Buyer beware of financing conditions

Before making an offer to
purchase, make sure bank's offer
to finance includes necessary
value appraisal

Most real estate offers are
conditional on the buyer obtaining
the necessary financing to
complete the purchase. This
condition is typically for a period of
three to seven days, to give buyers
the time to confirm with their
mortgage broker or lender that
they are approved for the
necessary funds.
Upon receiving this approval, the buyer then waives the condition in the offer and the
agreement becomes "firm." If the buyer is unable to obtain the financing approval, then
he or she notifies the seller and the agreement is terminated.
However, there are many other important legal rights and obligations that buyers must
understand with respect to a financing condition.
Firstly, just because their lender provides the initial approval, there are typically other
conditions that still have to be satisfied before they will give you the money.
Chiefly, the lender must be satisfied from their own appraiser that the appraised value of
the house or condominium is equal to or greater than the amount that the buyer has
agreed to pay for it.
For example, let's say you sign an agreement for $300,000 for a home and you are
approved for financing of $225,000, which is 75 per cent of the value of the home. If the
bank's own appraiser actually values the same property at only $275,000, then the bank
in most cases will not lend you the full $225,000. They may only lend you 75 per cent of
$275,000, which is $206,250 and then expect you, the buyer, to come up with the
difference of $18,750.
This can occur perhaps just before closing, making it extremely difficult for the buyer to
come up with the extra funds in time.
When buyers start looking for a home, they should first meet with a lender or mortgage
broker to find out how much they can safely afford to borrow. They should also ask what
the lender's appraisal practices are and what other conditions have to be satisfied before
they receive their funds. Ideally, the lender will complete the appraisal and have all
conditions satisfied before you waive your financing condition.
TheStar.com - Real Estate - Buyer beware of financing conditions
It is also important for buyers to understand that when they make a transaction
conditional on financing, they have a legal obligation to act in good faith in trying to
satisfy this condition.
The buyer cannot simply do nothing and then say to the seller that the deal is off because
they could not obtain financing. They must actually apply to a lender in good faith for the
financing and then be turned down, in order to legitimately cancel the agreement. If not,
the seller can claim the buyer has not acted in good faith in trying to satisfy the condition
and can refuse to return the deposit, or sue the buyer for damages for breaching the
contract.
Let's say an agreement is conditional on the buyer obtaining a mortgage for $200,000.
The buyer applies to a bank for the mortgage but is not approved. Can the seller then
offer to take back a mortgage for $200,000 and try to force the buyer to waive the
condition? The answer is no, unless there was an additional clause added to the
agreement that gave the seller the right to provide the financing in the event the buyer
was not approved by the lender.
It is very important for buyers to understand all legal rights and obligations relating to a
financing condition, as well as the complete process, requirements and other conditions
that a lender will require