Let’s set the stage:
You’re in a multiple offer scenario. There are five additional bidders that have their sights set on your home. To make your offer more competitive, your real estate agent asked if you’re comfortable removing your financing condition. They explain that unless you do so, the chances of getting the house are slim to none.
Because this is your first purchase, you’re still trying to wrap your head around how finance conditions work in the first place. If you were to seek the advice of a parent, they’ll tell you that a financing clause is absolutely essential. After all, this is what is going to protect you in the event that your financing falls through and you need to retract your offer.
So, what exactly is a finance condition and what happens when you remove it? Read on to learn more about what you need to know about the finance condition.
What is a Finance Condition?
When it comes to submitting a traditional offer, the majority of buyers are going to include a financing condition.
This condition allows the buyer enough time to arrange the appropriate financing for the home. If the financing is approved, the buyer can move forward in the purchase of the home. If the financing is rejected, the finance condition allows the buyer to walk away from the purchase without any penalties.
Why Remove It?
In a multiple offer scenario, the goal is to present as clean an offer possible. This will allow the sellers to accept the offer immediately and without the need for a conditional period.
In removing your finance condition, this makes your offer significantly more appealing to the seller. With this, they can firmly accept your offer in that very moment. As a buyer, there’s no conditional period that will allow you to retract your offer. Once the offer is firm, both parties are legally tied to the deal.
This strategy is extremely popular in hot real estate markets. This is because the buying agent knows that in multiple offers, the seller is very unlikely to work with an offer that has a finance condition.
What Are the Risks in Removing my Finance Condition?
Of course, removing your finance condition is going to significantly improve your offer. But, there are risks involved in removing such a condition if you offer gets accepted.
Remember, a lender is only going to loan you as much as they consider the house to be worth. So, if you paid $800K and the lender appraises the home at $700K, they’re only going to lend you based on the appraised amount.
So, what happens now?
With a finance condition in place, you can retract the offer and move on without any penalties.
However, without a finance condition you are legally tied to the offer and must complete the purchase.
This means that you’re on the hook to fund the remaining $100K in order to complete the transaction. Unless you’re able to fund this amount, you’re not going to be able to close on the sale. When this happens, you’re going to face both financial and legal repercussions from the seller.
In the event that you’re unable to complete your transaction, you’re going to have to forfeit your deposit to the seller. If the seller really wants to take things further, they can technically decide to sue you for damages.
How Can You Best Protect Yourself?
If you’re considering removing your fiance condition, you need to ensure that you are working closely with your lender. It’s imperative that you have a solid pre-approval from your lender and that your lender is aware that you’ve opted to remove the clause.
You’ll also want to be sure that you have adequate savings in the bank. After all, you might need to dip into these savings if your offer is accepted and the property is appraised below your loan amount. Because you no longer have a finance condition, you can’t back out of the offer if the appraisal is too low.
To Include or Not to Include?
At the end of the day, the decision to remove the finance condition is entirely up to the buyer.
While removing a finance condition is sure to make your offer more appealing, it does involve a certain level of risk. If you’re willing to endure such risk, you want to ensure that you have a solid understanding of what this means. You also want to have a detailed backup plan in the event that your financing falls through.
All in all, it’s best to work in close proximity with your lender throughout the offer process. They will help to highlight any red flags with the financing and help you plan accordingly.
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