Real Estate

Should the financing clause specify mortgage terms?

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  • Oct 7th, 2019 10:11 pm
[OP]
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User avatar
Sep 28, 2019
2 posts

Should the financing clause specify mortgage terms?

Hey everyone. Long time lurker, first time I couldn't find an answer without posting. So thanks to you all for all that I've learned from RFD threads so far.

I feel like this should be a simple question, but I'm getting conflicting advice from my realtor and lawyer.

Consider this subject clause in a real estate purchase offer (I'm the buyer, in BC, haven't signed it yet).
Subject to the Buyer being approved and satisfied with financing at the current rates and conditions, with a lender of the
Buyer's choice, to be supported by an appraisal equal to or greater than the purchase price, if required by the lender, on or
before <date>. This condition is for the sole benefit of the Buyer.
Lawyer says this subject is so vague that it is basically unenforceable. Meaning, as a buyer I am not well protected by it because it doesn't put any specific limits on what terms should be acceptable to me. Being self-employed, I don't want to be forced to seek out and accept a private lender's 10% interest rate offer. So the lawyer recommends to include specific mortgage terms such as loan amount, amortization period, mortgage term, and interest rate.

On the other hand, my realtor is adamant that this condition should work as-is and that it's actually good for me because it "clearly says that the offer should be to your satisfaction", and that she doesn't like to include mortgage terms because that would "give the seller more information about your financial situation". But I don't understand what she means by that, I'm not giving the seller the terms of my pre-approval or anything personal, just a list of mortgage terms that could be considered barely-acceptable, such as "20% down, 3 year term, 25 years amortization, max 3.5% interest rate".

I searched, but couldn't find any recommendations for this online. So, how is it usually done? And why would the realtor disagree with the lawyer on such a simple thing? Do sellers really see specifying the mortgage terms in the clause as a negative?

Thanks for any advice.
9 replies
Deal Addict
Jan 15, 2017
4004 posts
3477 upvotes
It is pretty vague. Current rates and conditions could mean anything. Discounted rates? Posted rates? But here's the thing - you are getting advice from 2 sources - one, your Realtor who most likely has very little formal training and very little training in contract law vs your lawyer who presumably has formal training and experience in Real Estate law and contract law. Personally, I would put much more substantial weight on the advice of my lawyer than my Realtor. After all, if there is a future challenge with this condition you will be turning to your lawyer for guidance, not your Realtor.
Deal Addict
Feb 16, 2018
1291 posts
1295 upvotes
Any properties I have bought have had a financing clause which read something along the lines of "Subject to the buyer obtaining financing at the buyers sole and absolute discretion"

I can't remember exactly what it said but it was very close to the above. We have has the same realtor for the past 25 years and have multiple properties and they all had this clause wodered this way
Deal Addict
User avatar
Jan 2, 2012
4021 posts
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Toronto
HghSsociety wrote: Any properties I have bought have had a financing clause which read something along the lines of "Subject to the buyer obtaining financing at the buyers sole and absolute discretion"

I can't remember exactly what it said but it was very close to the above. We have has the same realtor for the past 25 years and have multiple properties and they all had this clause wodered this way
In the vast majority of cases the financing condition is signed off and the deal proceeds, so how it's worded is irrelevant. It only becomes an issue if a buyer tries to cancel a deal due to financing clause, AND the seller tries to take them to court over it. Until this happens, the wording of the clause would never be an issue.

Also need to note that "sole and absolute discretion" does not mean the buyer can back out the deal for any reason they like, and simply claim financing as the reason. The buyers still has a duty to try and get financing in good faith. If it ever went to court and it turns out the buyer didn't really shop for a mortgage, or they actually got an offer that was very competitive based on market at the time, a judge may find they acted in bad faith and award damages to the seller.
transitored wrote: Hey everyone. Long time lurker, first time I couldn't find an answer without posting. So thanks to you all for all that I've learned from RFD threads so far.

I feel like this should be a simple question, but I'm getting conflicting advice from my realtor and lawyer.

Consider this subject clause in a real estate purchase offer (I'm the buyer, in BC, haven't signed it yet).



Lawyer says this subject is so vague that it is basically unenforceable. Meaning, as a buyer I am not well protected by it because it doesn't put any specific limits on what terms should be acceptable to me. Being self-employed, I don't want to be forced to seek out and accept a private lender's 10% interest rate offer. So the lawyer recommends to include specific mortgage terms such as loan amount, amortization period, mortgage term, and interest rate.

On the other hand, my realtor is adamant that this condition should work as-is and that it's actually good for me because it "clearly says that the offer should be to your satisfaction", and that she doesn't like to include mortgage terms because that would "give the seller more information about your financial situation". But I don't understand what she means by that, I'm not giving the seller the terms of my pre-approval or anything personal, just a list of mortgage terms that could be considered barely-acceptable, such as "20% down, 3 year term, 25 years amortization, max 3.5% interest rate".

I searched, but couldn't find any recommendations for this online. So, how is it usually done? And why would the realtor disagree with the lawyer on such a simple thing? Do sellers really see specifying the mortgage terms in the clause as a negative?

Thanks for any advice.
I would go with what your lawyer said.

Ask your realtor how many cases they've actually seen in court about cancelling deal due to financing condition.

Edit: Here is an article writen by a lawyer on the exact topic, that backs up what your lawyer is saying: http://www.garfinkle.com/News/News/RETH ... TIONS.aspx
Another key takeaway is that agents acting for sellers should remove subjective elements from a financing condition clause. Financing conditions should never be subject to the Buyer’s “discretion”, “opinion” or “satisfaction”. Financing can be objectively measured, the tastes or sensibility of the buyer have no relevance. If a buyer needs a certain mortgage amount or interest rate for the purchase to be feasible, the seller should insist that those specific values are written into the contract. This enables the seller to know how genuine and reliable the buyer is, while not limiting the buyer’s protection against unforeseen circumstance frustrating his ability to obtain reasonable financing.
Deal Fanatic
Jul 3, 2011
5825 posts
2976 upvotes
Thornhill
They're both right.

The clause is too vague which is always a problem for the side that wrote it, if it's ever challenged by the seller. But, conversely, the lawyer is preferring a clause that automatically binds you as a buyer if you're approved for the mortgage as described in the clause and can't back out of it for any reason which is very dangerous, and I'm frankly surprised a buyer's lawyer would suggest a clause that protects the seller over the buyer.
transitored wrote: Hey everyone. Long time lurker, first time I couldn't find an answer without posting. So thanks to you all for all that I've learned from RFD threads so far.

I feel like this should be a simple question, but I'm getting conflicting advice from my realtor and lawyer.

Consider this subject clause in a real estate purchase offer (I'm the buyer, in BC, haven't signed it yet).



Lawyer says this subject is so vague that it is basically unenforceable. Meaning, as a buyer I am not well protected by it because it doesn't put any specific limits on what terms should be acceptable to me. Being self-employed, I don't want to be forced to seek out and accept a private lender's 10% interest rate offer. So the lawyer recommends to include specific mortgage terms such as loan amount, amortization period, mortgage term, and interest rate.

On the other hand, my realtor is adamant that this condition should work as-is and that it's actually good for me because it "clearly says that the offer should be to your satisfaction", and that she doesn't like to include mortgage terms because that would "give the seller more information about your financial situation". But I don't understand what she means by that, I'm not giving the seller the terms of my pre-approval or anything personal, just a list of mortgage terms that could be considered barely-acceptable, such as "20% down, 3 year term, 25 years amortization, max 3.5% interest rate".

I searched, but couldn't find any recommendations for this online. So, how is it usually done? And why would the realtor disagree with the lawyer on such a simple thing? Do sellers really see specifying the mortgage terms in the clause as a negative?

Thanks for any advice.
[OP]
Newbie
User avatar
Sep 28, 2019
2 posts
Thanks guys, I ended up changing the clause to include specific terms. I hope I will find a bank that will give me a better rate than what I wrote, but worst case I am ok to be bound by the mortgage terms I put in the offer. Better than having the clause unenforceable.
Ask your realtor how many cases they've actually seen in court about cancelling deal due to financing condition.
That's exactly it, she's always saying how everything always goes smoothly and wasn't able to give much advice on how things can fall apart, which is why I consulted the lawyer.
Member
Nov 26, 2012
324 posts
282 upvotes
Toronto
Technically you can put whatever terms you want in your offer. Whether it gets accepted is another thing.

Generally, a lawyer is going to give the best contract advice (which is what the offer is, a contract). However, the question is then whether the seller will find your offer attractive. So you must live in an area that is a buyer's market. As a seller, I would think 'this buyer doesn't even have financing pre-approval in place, he probably can't actually afford to pay for my place.' The whole point of pre-approval and getting locked in interest rates for x days is so this general financing clause doesn't affect your deal. The clause shouldn't even be a concern from that perspective.

In my opinion, the part that really matters is the lender appraisal. Because that is actually something that the buyer can't know the result of ahead of time. I've actually heard of lender appraisals coming in lower than purchase price in the long ago past and the buyer has two options. Back out of the deal or try to re-negotiate the purchase price.
Deal Addict
User avatar
Jan 2, 2012
4021 posts
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Toronto
niche54 wrote: Technically you can put whatever terms you want in your offer. Whether it gets accepted is another thing.

Generally, a lawyer is going to give the best contract advice (which is what the offer is, a contract). However, the question is then whether the seller will find your offer attractive. So you must live in an area that is a buyer's market. As a seller, I would think 'this buyer doesn't even have financing pre-approval in place, he probably can't actually afford to pay for my place.' The whole point of pre-approval and getting locked in interest rates for x days is so this general financing clause doesn't affect your deal. The clause shouldn't even be a concern from that perspective.

In my opinion, the part that really matters is the lender appraisal. Because that is actually something that the buyer can't know the result of ahead of time. I've actually heard of lender appraisals coming in lower than purchase price in the long ago past and the buyer has two options. Back out of the deal or try to re-negotiate the purchase price.
A "pre-approval" is still not a guarantee of getting the mortgage secured. As you noted, there is the appraisal issue. Or some lenders will not go through all the due diligence (i.e. proof of employment data, proof of other debts/assets, etc) until after the offer is accepted and real mortgage applied for, and the app passes through more underwriting people. Also some life/financial events may happen inbetween pre-approval and applying for firm mortgage that may affect it.

End result is a buyer should still always strive to include the financing clause, even if they have a pre-approval in place. Perhaps showing the pre-approval as part of the offer would help alleviate any fears a seller may have.

Of course in a sellers market a clean offer with zero conditions will always be the most attractive. Up to the buyer if risk, no matter how small it's perceived to be, is worth it.
Banned
Sep 19, 2012
1253 posts
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Calgary
rob444 wrote: A "pre-approval" is still not a guarantee of getting the mortgage secured. As you noted, there is the appraisal issue. Or some lenders will not go through all the due diligence (i.e. proof of employment data, proof of other debts/assets, etc) until after the offer is accepted and real mortgage applied for, and the app passes through more underwriting people. Also some life/financial events may happen inbetween pre-approval and applying for firm mortgage that may affect it.
+1. Pre-approvals aren’t really worth much given that there has been zero due diligence on the property (because there is no property yet). I’ve worked on deals where lenders pulled out because something about the property was giving them concern. It’s to be expected: the property is securing their loan so lenders won’t proceed until they’ve thoroughly vetted that.
Nikola Alaica, CPA, CA | Tax, Accounting, Mortgages
Member
Nov 26, 2012
324 posts
282 upvotes
Toronto
rob444 wrote: A "pre-approval" is still not a guarantee of getting the mortgage secured. As you noted, there is the appraisal issue. Or some lenders will not go through all the due diligence (i.e. proof of employment data, proof of other debts/assets, etc) until after the offer is accepted and real mortgage applied for, and the app passes through more underwriting people. Also some life/financial events may happen inbetween pre-approval and applying for firm mortgage that may affect it.

End result is a buyer should still always strive to include the financing clause, even if they have a pre-approval in place. Perhaps showing the pre-approval as part of the offer would help alleviate any fears a seller may have.

Of course in a sellers market a clean offer with zero conditions will always be the most attractive. Up to the buyer if risk, no matter how small it's perceived to be, is worth it.
Never said pre-approval is a secured mortgage or that he shouldn’t have a finance clause. Just pointing out that if OP is that concerned about rates, he should get a pre-approval that’s vetted by the underwriters with the rate locked in. If his purchase price is that off base from the appraisal that it would result in him needing a sub prime mortgage with 10% interest in this rate environment, that is problematic. Also an accurate signal to the seller that the buyer may not be able to close on the deal.

Also, if a buyer makes an offer with a life change that knowingly would negatively affect his ability to obtain financing, that’s in bad faith. If the seller finds out why and sued, how detailed the clause is won’t make much of a difference.

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