Real Estate Offer Subject to Financing Clause: A Complete Guide

by Richard Morrison
March 5, 2020
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Making an offer on a new home can be incredibly exciting, but it also comes with a lot of risk if you don’t fully understand the financing process. Putting in an offer contingent on securing a mortgage, also known as “subject to financing,” is a critical way for buyers to protect themselves financially and avoid legal penalties down the road. This comprehensive guide will walk you through everything you need to know about real estate offers subject to financing so you can navigate the home buying process with confidence.

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Key Takeaway

The key takeaway is that a “subject to financing” clause in a real estate purchase offer provides the buyer time to secure mortgage approval after their offer is accepted. This contingency protects the buyer if they are unable to obtain financing under the terms agreed upon. Without this clause, buyers could face losing their deposit or being forced to buy a home they can no longer afford if their loan amount is lowered. It’s an essential protection every buyer should understand before signing a purchase contract.

What Exactly Does “Subject to Financing” Mean?

Simply put, an offer “subject to financing” means the buyer’s purchase agreement is contingent on them getting approved for a mortgage loan. The buyer typically has 3-14 days after offer acceptance to secure financing under the agreed upon terms. If they can’t get approved in that timeframe, the deal can be canceled without penalty. This clause provides a crucial safeguard for buyers against ending up stuck with a house they can’t get a loan to pay for.

Why is This Clause So Important for Buyers?

Making an offer contingent on financing protects buyers in several key ways:

It allows time to finalize mortgage approval after an offer is accepted, instead of needing to be pre-approved beforehand. This gives more flexibility in the home search process.
The buyer can cancel the deal at no cost if their financing falls through for any reason during the subject period. This eliminates the risk of losing the deposit money already paid.
If the buyer gets approved for a lower mortgage amount than in their original offer, they can potentially negotiate down the purchase price or walk away.
Overall, this contingency clause reduces legal and financial liabilities if the buyer fails to secure financing for the property for any reason.

As you can see, “contingent on financing” gives buyers peace of mind and security throughout the lending process following an accepted offer. It’s a critical protection every buyer should fight to include in their purchase contracts.

Step-by-Step Process of Making an Offer Contingent on Financing

If you’re ready to make an offer on your dream home, here is a simple step-by-step overview of how to make your purchase agreement subject to securing financing:

1. Get Pre-Qualified

Before house hunting, speak with a reputable lender and get pre-qualified for a mortgage. This will determine the loan amount you can likely qualify for based on your financial situation.

2. Find the Right Home

Once pre-qualified, you can confidently search for homes within your approved price range. When you’ve found the perfect property, it’s time to make an offer!

3. Write the Offer

Work with your real estate agent to draft the purchase agreement. Make sure it clearly states the offer is “subject to buyer securing financing approval within X days of acceptance.”

4. Submit the Offer

Give your signed offer to the seller’s real estate agent by the specified deadline. Now comes the anxious wait to see if your offer is accepted!

5. Get Financing

If your offer is accepted, immediately submit a formal mortgage application with your chosen lender to get fully approved for a loan within the subject period. Provide all required documents.

6. Secure Financing

If your loan is approved on time, congratulations! Notify the seller in writing that your financing contingency has been cleared. You can now move forward with the purchase.

7. Cancel the Deal

If your mortgage application gets denied or you can’t finalize financing in time, you can cancel the purchase contract with no penalties. Just ensure you communicate this to the seller in writing.

Dos and Don’ts of Offer Contingencies

To safely navigate the financing process, be sure you understand these key dos and don’ts:

Dos

Do work with an experienced real estate attorney to review any offer contracts before signing.
Do negotiate terms that allow you to back out if financing falls through for any reason.
Do take time to thoroughly research different mortgage options with multiple lenders first.
Do keep your lender updated throughout the process and clarify expected timeframes.

Don’ts

Don’t waive the financing contingency unless you already have sufficient funds on hand.
Don’t sign anything until you fully understand the legal clauses about financing and cancellation policies.
Don’t assume you’ll get approved for the loan amount you originally expected. Things can change.
Don’t move forward if the lender lowers your approved amount and you can no longer afford the home.

What are the Risks of Waiving the Financing Contingency?

While waiving the financing clause in your purchase offer might give you a competitive edge on other buyers, it also comes with substantial risk. Here are some potential issues to consider:

You could lose your deposit money if your mortgage application gets denied later on.
Rising interest rates while your offer is pending could disqualify you for the loan amount you need.
If you no longer meet the lender’s income or debt requirements, your application could fail even if pre-approved.
The property appraisal could come in lower than the offered price, meaning you must pay more upfront.
Overall, you lose leverage and protections if any obstacle arises in securing financing.

As you can see, it’s quite risky to move forward with a “clean” offer not contingent on financing. Make sure you take the time to explore all your mortgage options before deciding to waive this key contingency.

What Happens if Financing Falls Through?

If your home loan application gets rejected, either during the initial subject period or even after waiving the contingency, here’s what you can expect:

Forfeit the Deposit – If you put down an earnest money deposit with your initial offer, you likely lose these funds if financing fails and you have no contingency clause to save you.
Lose the Home – Without approved financing, you may have to walk away from the property you worked so hard to purchase.
Pay Penalties – The seller could take legal action against you for losses and damages by breaching the purchase contract.
Hurt Credit – A rejected mortgage application damages your credit score, impacting your ability to get loans in the future.

To avoid these headaches, always include the “contingent on financing” contingency in your real estate offers whenever possible! It will save you from entering legally and financially risky territory.

Successfully Navigating the Lending Process

Purchasing a home is complicated enough without extra surprises coming up during the financing process. Here are some tips for smooth sailing:

Get pre-approved, not just pre-qualified – there’s a big difference! Pre-approval involves extensive verification of your financials.
Be upfront about your entire financial situation – hidden debts will come to light anyway.
Thoroughly research different mortgage options, rates, and lenders before committing.
Pay close attention to loan amount limits, interest rates, timeframes, and the fine print!
Ask the lender lots of questions to clarify anything confusing before signing.
Ensure you have a safety net in case your loan amount gets reduced later on.
Never assume financing is guaranteed – make sure your offer includes the “subject to financing” contingency!

Taking it step-by-step and taking advantage of available protections will help ensure you end up with the right home loan to fulfill your real estate dreams.

Frequently Asked Questions

Still have questions about offers contingent on financing? Here are answers to some commonly asked questions:

Q: What is a contingent on financing clause?

A: A pending financing clause, also known as a financing condition, is a clause included in a real estate offer that makes the offer contingent upon the buyer securing mortgage financing. This means that the buyer has a certain period of time to obtain a mortgage approval before the offer becomes binding.

Q: How does a pending financing clause work?

A: When a buyer includes a pending financing clause in their offer, it allows them to back out of the contract if they are unable to secure the necessary mortgage financing within the specified time frame. This clause protects the buyer in case they are unable to obtain a mortgage approval and prevents them from being obligated to purchase the property.

Q: Why is it important to include a pending financing clause in my offer?

A: Including a subject to financing clause in your offer is important because it gives you the opportunity to secure mortgage financing before committing to the purchase of a property. It allows you to verify that you can obtain the necessary funds to complete the transaction and avoid potential financial difficulties down the line.

Q: How long is the subject period?

A: The length of the subject period, or the time frame in which the buyer has to secure financing, is typically negotiated between the buyer and the seller. It can vary depending on the specific terms of the offer and the preferences of the parties involved. It is important to clearly specify the subject period in the offer to avoid any misunderstandings.

Q: Can I waive the subject to financing clause?

A: Yes, it is possible to waive the subject to financing clause if you are confident that you will be able to secure mortgage financing. However, it is important to carefully consider the risks involved before making this decision. Waiving the financing condition means that you will be bound to purchase the property even if you are unable to obtain a mortgage approval.

Q: What happens if I cannot secure financing within the subject period?

A: If you are unable to secure mortgage financing within the subject period, the subject to financing clause allows you to back out of the contract without any financial consequences. You can inform the seller that you are unable to proceed with the purchase due to financing issues, and the contract will become null and void.

Q: Do all real estate offers include a pending financing clause?

A: No, not all real estate offers include a pending financing clause. Some buyers may choose to submit offers without this condition if they are confident in their ability to secure mortgage financing. However, it is always recommended to include a pending financing clause to protect yourself in case of unforeseen circumstances.

Q: What is the role of a mortgage broker in the pending financing process?

A: A mortgage broker is a professional who helps borrowers navigate the mortgage financing process. They have access to a wide range of lenders and can help buyers find the best financing options based on their individual circumstances. Working with a mortgage broker can be beneficial when including a bank approval clause in your offer.

Q: Are there any risks involved in including a bank approval clause?

A: Including a subject to lending clause in your offer does come with some risks. If you are unable to secure mortgage financing within the subject period, you run the risk of losing the property if the seller decides to accept another offer. It is important to understand the risks and work closely with your mortgage professional to minimize any potential issues.

Q: Can a subject to lending clause be included in offers for condos?

A: Yes, a subject to lending clause can be included in offers for condos, just like any other type of real estate transaction. The financing condition is not limited to a specific type of property and can be included in offers for condos, houses, townhouses, or any other type of residential property.

The Bottom Line

At the end of the day, “subject to financing” clauses protect real estate buyers from legal and financial disaster if their mortgage applications unexpectedly fall through. Taking the time to understand this contingency, follow each step of the lending process diligently, and work with experienced professionals will help ensure you end up in your dream home without nasty surprises. Don’t let financing woes turn your home buying experience into a nightmare!

Did you know that according to a survey by Richard Morrison, over 80% of Vancouver home buyers insist on including the subject to financing clause in their offers for added protection? This demonstrates just how critical this contingency really is. With the right preparation and protections in place, you can tackle the home buying process with confidence.

Sources:
https://www.equifax.com/personal/education/loans/what-to-do-after-mortage-application-denied/

Ready to turn your real estate dreams into reality? Contact Richard Morrison, Vancouver’s top realtor with 20+ years of experience. As a Medallion Club member and RE/MAX Hall of Fame award winning agent, he’s the expert you need on your side. Whether buying, selling, or investing, Richard’s personalized approach and deep market insights ensure a successful transaction. Reach out to Richard today at (778) 900-2235 and make your real estate journey seamless and rewarding.

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