There is no denying that the housing market in Vancouver is on fire. If you’re looking to buy a property in this market, no doubt you’re stressed out. With all the talk about multiple offers, listings going for millions over asking price, and foreign buyers purchasing sight unseen, how do you make the best offer you can? How are you supposed to compete? At about this time you’ll ask yourself (or your Realtor will ask you), how important is that condition of financing anyway? Should I write a subject free offer?
If you are considering a subject free offer, let’s start by discussing a common misconception, the difference between a preapproval and an approval.
A preapproval is when we have determined how much of a mortgage you qualify for, we have pulled your credit report, and we have submitted your application to a lender to have them assess your situation and guarantee you a rate for a specific period of time. With a preapproval in hand, you are guaranteed absolutely nothing.
A preapproval should never be relied on as a guarantee of financing, and it should never give you the confidence to write an offer without a condition of financing.
An approval on the other hand is when you have made an offer on a property, we have submitted your application along with all the supporting documentation, the lender has assessed your documents and has found both you and the property to be a good risk. At this time, they will issue an approval letter and you can be confident financing will go through. The problem is, lenders don’t issue approvals before you have an accepted offer on a property. Thus the importance of a condition of financing.
It’s standard practice to include a clause in the purchase contract, to allow five days to arrange financing. Even if you are the most qualified applicant in Canada, if the property you are purchasing doesn’t meet the lender’s criteria, they will not issue you a mortgage. Period. Now, if you end up making a subject free offer on a property, and are not able to secure financing, you will lose your deposit, and run the risk of getting sued. Not a good scene.
So is there ever a time when a subject free offer is ok? Ultimately that will be up to you and your tolerance to risk, but if you are considering it, you should most definitely have a plan. Collect as much information up front about the property, and look for red flags? If the property is a current or remediated grow-op, a “handyman special”, has water or fire damage, or does not conform to the neighbourhood, any of these could be huge issues to the lender.
If you don’t have at least a 20% downpayment, subject free isn’t for you. However if you have worked through a detailed plan with your mortgage broker, made a back up plan, and understand all the risks, it’s your call.