A financing condition gives you a set period, usually 5 to 10 business days, to confirm that your lender will actually fund the purchase of that specific property. If the financing is not in place by the deadline, you can walk away from the agreement and recover your deposit. It is the only part of an offer that protects you against the property itself failing to support the mortgage you were approved for.
So you’ve been pre-approved or pre-qualified by your mortgage broker and are now hot on the trails of your new home. There’s only one problem: you’re losing out on every offer you place.
You might have been advised by family, friends, or a Realtor that a stronger deal will result in a winning bid. And by stronger that usually means removing conditions on your offer to make it more appealing to the seller. These conditions can include home inspections and financing conditions. I’ll be focusing on the financing condition today
What a financing condition is, and how it ends
A financing condition ends one of two ways: you fulfil it, or you walk. Fulfilling it means your lender has issued a mortgage commitment and you sign a notice confirming the condition is satisfied. Walking means the deadline passes without that financing, and you exit with your deposit.
A financing condition is a condition placed on the offer of a property that typically states that the buyer has a certain amount of time (typically 5 to 10 business days) to arrange financing acceptable to the buyer. If that financing is not put into place before the expiry of that condition the buyer has the option to walk away from the offer. If financing has been arranged (in the form of a mortgage commitment being issued by the bank, and sometimes the completion of a home inspection…more on that second part in a minute) then the buyer can fulfil the financing condition (by way of a Notice of Fulfillment). Once all conditions that have been placed on the offer are either waived or fulfilled, the offer becomes firm.
Why a pre-approval is not enough on its own
A pre-approval assesses you. A financing condition protects you against the property. Those are two different tests, and passing the first does not mean you pass the second. A lender underwrites the borrower and the property, and it has not seen the property when it pre-approves you. This is set out in detail in why a pre-approval does not do the job of a financing condition.
Okay so let’s back up to why you would put a financing condition on a property to begin with. After all, your mortgage broker or bank approved you, right? Well, not so fast. A pre-approval (or what we like to refer to as a pre-qualification) means that we have reviewed your income, credit and other variables (such as down payment) and have determined that you can afford X amount of mortgage. Should be pretty straightforward now, right? Not exactly. The other pillar that banks are looking at when it comes to lending you money is the property. That’s right, the lender is lending you money, but not on a handshake and a promise. They are registering a loan equivalent (or sometimes more in the case of collateral charge mortgages) on your property when you close.
What a low appraisal does to your down payment
The lender lends on the lesser of the purchase price or the appraised value, so a low appraisal comes straight out of your pocket. The seller still expects the full price on closing day. The gap is yours to fund in cash.
I’ll illustrate with an example. Let’s say you are pre-qualified for a mortgage of $520,000. Along with your down payment we calculate that you can afford a home of $650,000. You and your Realtor then hunt for that perfect home and find one that you decide to put an offer down for exactly $650,000 that is accepted by the seller. Approved! Right? Well it’s not that easy. Turns out that home was listed for $499,000 and you went right up to your maximum purchase price. After the bank requests an appraisal it turns out that the determined value is $550,000 – $100,000 lower than what you just offered. This is where you have to be very careful. Remember, the bank will lend on the lesser of the purchase price or appraised value. So in this case, the bank will use the appraisers value of $550,000 to determine the loan amount. For an uninsured purchase (where you are putting 20% or more of a down payment) this changes your maximum loan from $520,000 (80% of $650k) to $440,000 (80% of $550k). Meaning your down payment of $130,000 has to move up to $210,000 in order to make up the difference (80% of $100k difference). That seller still is expecting $650,000 on closing day in their account.
| If the appraisal matches the price | If the appraisal comes in at $550,000 | |
|---|---|---|
| Purchase price | $650,000 | $650,000 |
| Appraised value | $650,000 | $550,000 |
| Value the lender uses | $650,000 | $550,000 |
| Maximum loan at 80% | $520,000 | $440,000 |
| Down payment you must bring | $130,000 | $210,000 |
| Extra cash needed on closing day | None | $80,000 |
Why the lender lends on the lower number
Because the property is the lender’s security, not your promise to pay. If the loan ever has to be recovered by selling the property, a loan written against a price above market value cannot be recovered in full.
So why exactly do banks do this? Well, suppose down the road you are not able to make your payments and default on your mortgage. The lender will try to recover the mortgage loan by selling the property on the open market to pay off the outstanding balance (and usually some hefty fees are also added to this cost). If they provide you a loan based on the purchase price vs the appraised value they have increased their risk position, and as we know banks like to make money not to lose it. If that house isn’t worth what you paid, they’ll have a hard time recouping the money owed to them.
This is even more apparent with insured mortgages. That is, when a borrower has to obtain mortgage insurance due to putting less than 20% down (they have less skin in the game and a higher loan to value position).
Should you waive the financing condition?
Waiving the condition does not commit your lender to anything. It only commits you. You take on the property risk personally, and the deposit is the first thing exposed if the financing does not come together. There is a fuller breakdown of what you actually lose when you waive, and of going in without the condition in a competing-offer market.
The last few years have been a very aggressive sellers market, there’s no doubt about that. With multiple bidding wars and people being priced out of neighbourhoods it has been leading many buyers to drop all conditions on an offer and often times go in much higher than the asking price. Remember that just like home or life insurance a mortgage condition is there to protect you. It can be a pain to deal with, but you’ll be darn glad to have it if you ever need it.
So what are you to do? Should you waive the financing condition? Well, my recommendation in this market is to work closely with your mortgage broker and Realtor to fully understand the market. Eliminate as much doubt on the property that you can when it comes to value (request a home inspection up front, or review recent sales comparables). Your mortgage broker can also make recommendations based on historical appraised values in your area to help minimise your risk exposure. Sometimes you can eliminate redundant conditions, or remove some if given ample time to fulfill others. I also like to run through worst case scenarios and come up with a plan B and C if my clients are set on going in firm on an offer. This is a strategy that can often work in your favour and ease anxiety and stress and has helped many of my clients. Remember, like anything in life, devising a well thought out plan and being able to quickly execute on it helps when trying to win out on your home
| Risk | Offer with a financing condition | Offer with no financing condition |
|---|---|---|
| Lender declines the borrower at final underwriting | You can exit before the deadline | You are committed to close |
| Appraisal comes in below the purchase price | You can exit before the deadline | You fund the gap in cash |
| Property type the lender will not finance | You can exit before the deadline | You must find another lender or close another way |
| Condominium documents reveal a problem | You can exit before the deadline | You are committed to close |
| Deposit | Returned on a proper exit | Exposed if you cannot close |
| Seller’s view of your offer | Weaker in a competing-offer situation | Stronger in a competing-offer situation |
What has to happen inside the condition window
The window is not waiting time, it is working time, and most of the work is not yours. The sequence below is why a very short condition period is risky: a single slow step uses the whole window.
| Step | Who does it | What delays it |
|---|---|---|
| Full application and document package submitted | You and your broker | Missing income documents, down payment not yet traceable |
| Lender underwrites the borrower | Lender | Self-employed income, a second job, recent credit changes |
| Appraisal ordered and completed | Lender, through an approved appraiser | Appraiser availability, rural or acreage property, limited comparable sales |
| Condominium documents reviewed, where the property is a condo | Your lawyer, and the lender | The corporation’s turnaround on a status or estoppel certificate |
| Mortgage commitment issued | Lender | Any condition the lender attaches to its own approval |
| Notice confirming the condition is satisfied | You, through your agent | Leaving it to the deadline with nothing in reserve |
If a step is going to run past the deadline, the request to extend has to go in before the deadline, not after it. An extension is an amendment that the seller is free to refuse, covered in extending a financing condition. The full document sequence is in what your lender needs during the condition period.
Frequently Asked Questions
What is a financing condition in Canada?
A financing condition gives you a set period, usually 5 to 10 business days, to confirm mortgage approval. If your lender declines, you can exit the purchase agreement and recover your deposit.
What happens if I waive my financing condition and my mortgage is declined?
If you waive the condition and cannot close, you are in breach of contract and risk losing your deposit. The seller may also pursue additional damages. Never waive without confirmed mortgage approval in writing.
Can my lender still decline my mortgage after I remove conditions?
Yes. Removing conditions commits you to the purchase but does not guarantee final mortgage approval. Lenders can decline at final underwriting if your income, credit, or the property does not meet their criteria.
How long does a financing condition typically last?
Financing conditions typically run 5 to 10 business days in Canada. In competitive markets, buyers sometimes accept shorter windows of 3 to 5 days, which increases risk if the lender needs additional documentation.
