In an overheated property market, there is increasing pressure on home buyers. The seller can ask you to bid without a financing condition. What exactly does that mean and how do you approach it?

Financing condition: what you need to know

  1. Why is a financing condition important?
  2. What are the risks of buying without a financing condition?
  3. Why does a seller sell without a financing condition?
  4. How to buy without a financing condition
  5. Opportunities with a financing condition
Financing condition

1. Why is a financing condition important?

Is buying without a financing condition a good idea? Usually not, but it depends on your personal situation. First of all, you need to know why these conditions are important.

If your bid on a property is accepted, you and the seller draw up a sale contract. It sets out the conditions of the sale (including the sale price and supply date). The contract also contains conditions precedent. They set out the circumstances under which the sale does not proceed. The financing condition is one of these circumstances, and it’s actually included in most sale contracts as standard.

As a buyer, the financing condition gives you a specific period – usually between 4 to 6 weeks – to obtain financing for a specific amount (generally the purchase price). If you cannot get the financing in this period, the sale is overturned, and you will not have to pay the seller substantial compensation. This is a useful escape route for a number of reasons.

When you submit a bid, your financing is not yet certain. Sometimes you won’t get the mortgage you’re after, for example if the provider thinks your income is too low to cover the home expenses, or if they do not want the home as security for a loan because there is something wrong with its foundations or structural state. Changes in your personal circumstances can also prevent you getting financing, such as loans you are unaware of, losing your job, divorce, or becoming unable to work.

The three-day thinking period buyers have is often too short to work this out.

2. What are the risks of buying without a financing condition?

If you buy a house without a financing condition, you’re running a financial risk. If the sale does not go through after all, the seller can still hold you to the sale contract. By law, the sale can only be overturned if you compensate the seller for damages. The remuneration provided for in the sale contract is usually 10% of the sale price – quite a hefty sum.

3. Why does a seller sell without a financing condition?

Foregoing this condition precedent gives the seller more certainty about the sale. For the most part, buyers who are certain they will obtain financing or have their own cash to pay with will still submit a bid. If the sale falls through, the seller also receives financial compensation for the delays they have suffered in the sales process.

4. How to buy without a financing condition

If you know the risk and are familiar with your financial options, you can decide to buy without a financing condition. Before bidding, keep the following in mind:

  • Know your financial options. Schedule a meeting with one of our advisors to chart all the risks.
  • Know the purchase and financing processes. This way you’ll know what rights and obligations apply to you at a given time. Viisi organises webinars on this on a regular basis.
  • Limit your risk. Make sure the sales contract states that the sale depends on the outcome of a building inspection. Request a valuation report as soon as possible once your bid has been accepted.
  • Remember that you have to pay 10% of the sale price if the sale unexpectedly does fall through.

Make sure you have a back-up

In practice, we only recommend bidding without a financing condition if you’ll be paying outright for the property or if you have a back-up plan through family or your business. If you don’t, then you may end up owing the 10% if you cannot obtain financing (even if this is due to circumstances out of your control).

5. Sticking with a financing condition

If you want to buy with a financing condition, will you be side-lined? Of course not! In our experience, sellers often agree to financing conditions if they believe the sale will go through. Offering the seller as much certainty as possible can have an impact on your chances. It is important that the seller has an idea of your options and preparations you have made:

  • Own investment = lower financing condition: let the seller know you’re contributing your own money to the purchase. This makes it easier to be accepted for a mortgage. The amount of the conditions precedent can therefore be lowered in the sale contract.
  • Shorter term financing condition: rather than 4 – 6 weeks, you can have a shorter period instead. The better you (and your advisor) have prepared your financing, the faster your mortgage application will go.
  • Mortgage advisor declaration: ask your advisor to confirm to the seller in writing that financing is not an issue. This increases the likelihood that your bid will be accepted.

Want to know more about bidding on a home?

Make sure you read our handy tips, or get in touch with our advisors for a no-obligation telephone discussion. We’d be happy to help you!

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