Financing Condition in an Ontario Purchase Agreement Explained

A financing condition makes your purchase depend on you getting a mortgage on acceptable terms. It is meant to protect you if the lender says no or the approval changes.

How it works depends on the wording in your agreement of purchase and sale, so the details matter. This article explains the general rules and the risks, and why a lawyer should review the exact clause.

What a financing condition does

A condition is a term that must be satisfied or waived before the deal becomes binding. Conditions such as a satisfactory home inspection must be waived or performed by the agreed time, and must be used in good faith. A financing condition works the same way.

A conditional agreement is not final and binding until all its conditions are met or waived. Until then, the deal is still open to ending on the terms of the condition.

What happens if the mortgage falls through

Depending on how the condition is worded, if it is not met the buyer may terminate or the contract may end automatically, with the deposit returned. That is why the wording and the deadline are important.

Good faith matters. The deposit is normally held by the brokerage in a real estate statutory trust account, and it can be released only with a mutual consent or release signed by all parties, or under a court order. If there is a disagreement over the deposit, the brokerage cannot pay it out until all parties agree or a court orders it, and if the brokerage still holds it after two years with no clear answer on who is entitled to it, the deposit goes to RECO.

The risk of waiving the condition

Once all conditions are waived, the agreement is firm and binding. If you waive the financing condition and the lender then declines, you may still be bound to close, and the deposit and other consequences are in play.

Sellers can also push the timing. A seller who has accepted a conditional offer may consider other offers, using an escape clause that requires notice to the first buyer and gives that buyer a set time, for example 48 hours, to waive or satisfy its conditions. If the first buyer waives or fulfils its conditions within the deadline, the seller must sell to that buyer on the original terms. In a competitive situation, that deadline can pressure you to waive.

• Waiving makes the deal firm and binding.
• Missing the deadline may let the seller move on, depending on the wording.
• Waive only when you hold a written mortgage commitment you are comfortable with.

The deposit and down payment

Paying the deposit late or withholding it can itself breach the agreement. In RECO's example, a buyer who held back a deposit due on acceptance until after an inspection may have given the seller grounds to terminate and seek damages.

Lenders also look at your down payment. Federal guidance sets a minimum of 5% for homes of $500,000 or less, and below 20% down you will typically need mortgage loan insurance. For CMHC insurance, the purchase price must be below $1,500,000, and a non-repayable financial gift from a relative is one traditional source of a down payment. If you are a newcomer, CMHC says permanent residents can use all of its homeowner mortgage loan insurance products with no minimum period of residency, while non-permanent residents need legal authorization to work in Canada, and a down payment from 5% applies. For newcomers, CMHC also says at least one borrower or guarantor needs a credit score of at least 600, and limited Canadian credit may be supported by alternatives such as an international credit report.

What to do next

• Get a mortgage pre-approval before you make an offer, and understand its limits.
• Have a lawyer review the financing condition wording and deadline before you sign.
• Pay the deposit on time as the agreement requires.
• Apply to lenders promptly and keep records of your efforts, since conditions must be used in good faith.
• Decide about waiving only with a written commitment in hand, because waiving makes the agreement firm and binding.

Frequently asked questions