Getting you the mortgage you deserve
Going in FIRM on your Offer
February 15, 2021 | Posted by: Ask Ana Cruz
What does NO Condition of Financing Mean for you?
Are you buying a home in today’s competitive market?
Today, we are going to talk about going in FIRM on an offer to purchase and what that means for you.
The current real estate market is making many home buyers feel that they have to submit an offer on a property with no conditions and so that usually leads to a lengthy phone call with our office where we explain what that would mean for them.
Whether this is your first purchase or your 10th, you may have not gone down this road as the real estate market has been unpredictable.
When you submit an offer to purchase on a property, normally there is a condition of financing, condition of inspection, condition of status certificate if you are purchasing a condo. These are the main standard conditions but there could be others that you and your realtor will explore.
By placing these conditions in your offer, you are asking the sellers to give you time to sort out your financing, get a property home inspector to review the home, and review the condo status certificate which is reviewed by your lawyer.
These conditions are in the offer and range in timeframe. In a normal real estate market, these time frames are usually 5 days and are there to protect you and ensure that you do your due diligence before you move forward.
When it comes to the financing condition, we use this time to submit your application to the lender and get you fully approved. During these 5 days, your lender will review your file in detail specifically looking at your updated income, updated credit, property information. If you have been pre-approved, then the lender is looking to see if the updated income and credit are the same or better than when the pre-approval was originally submitted. During the pre-approval process, we did not have the property to review and so now the lender will review the property that you are asking for financing on. Lenders look at the value of the property as well as marketability of that property amongst other criteria.
I can hear you now saying, “that all sounds great but I’ve been pre-approved and I know the property is worth what I paid for it, so the lender should give me the money” -- if only it was that simple.
Let’s look at an example:
Alex and Taylor are pre-approved for $800,000.
They submit an offer on a property that is listed at $650000 which is under their pre-approval amount so they are happy thinking it’s a slam dunk.
They submit an offer for $750,000 since they are in competition and really want that house and they go in FIRM, NO CONDITION (obviously, they did not call their broker *sigh*
So what’s the problem here? Well let me share with you what I would have said to Alex and Taylor if they had called me prior to submitting a FIRM offer.
● Going in FIRM, means that the house is yours. No give backs, if there is a leak in the basement, asbestos in the attic, bad wiring or electrical issues, those are now your problems to solve not the sellers
● You may have to cover a shortfall -when you go over asking price, there is a possibility that the lender will require an appraisal. If that appraisal comes in lower than what you paid for the
house, then you have a shortfall. A shortfall is the extra you paid for a home that is appraised at a lower amount. Here is an illustration:
○ Listing Price $650,000
○ Purchase Price $750,000
○ Appraisal Value $700,000
○ Now you have a shortfall of $50,000 ($750,000 -$700,000 = $50,000)
○ This means in the lenders eyes, they are financing based on the $700,000 and you
have to come up with the shortfall. This is especially an issue with buyers who are putting 5% down payment. This now means that their 5% is based on the $700,000 and they still have to cover the $50,000 difference in purchase price to appraised value.
● Lending area- let’s assume that during your search you decided that you want a rural property and didn’t think that was a big deal. Now, you are firm and find out that the lending area requires a higher down payment than you have.
● Property condition- you decided that you can handle the “handyman special”, “As-Is”, “Needs TLC” home. You didn’t call your broker to understand that most lenders will not lend on these types of homes, or require a much higher down payment.
● Buyers Remorse - after the excitement wore off, you decided that this house is not for you - too late. With no conditions, there is no going back, the home is yours.
There are a number of other reason, and we will not stop you from going in firm, but it is our responsibility to educate you as to what going in FIRM means and why we are cautious and always ask for even one - three day condition on financing whenever possible, so that we can mitigate the risks for you.
It goes without saying that getting a fully underwritten pre-approval is a critical step before you even get to this point. A fully-underwritten pre-approval is one where your Mortgage Broker (us) will collect all of your documents upfront to help mitigate any issues.
Also keep in mind that your Realtor is working for you and a good Realtor will have explained the risk prior to submitting a FIRM offer for more than a house is worth.
Final thought, remember the decision is yours, however the lender has final say.
Want to connect and review your options?
Email me at firstname.lastname@example.org | Call or text 905-870-0513
Alternatively our office can be reached via text at 289-769-8864