Mortgage Falls Through Before Closing in Ontario: Your Options

It is a stressful moment: conditions are waived, closing is approaching, and your lender withdraws or reduces the mortgage. You may be wondering whether you can walk away and whether you will lose your deposit.

This article explains in general terms how the situation works in Ontario and what options buyers often explore. The answer depends heavily on your agreement of purchase and sale, so get legal advice quickly.

Why waiving conditions matters

Conditions such as financing or a satisfactory inspection must be waived or performed by the agreed time before the deal becomes binding. 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. Once all conditions are waived, the agreement is firm and binding.

So the timing is the key question. If your financing condition is still in place, you may have a way out. If you have already waived it, the agreement is firm, and a lender's refusal is generally your problem rather than the seller's. Check your agreement and any waiver you signed.

What happens to the deposit

The deposit is normally held by the brokerage in a real estate statutory trust account. It can be released only with a mutual consent or release signed by all parties, or under a court order. Neither RECO nor the brokerage can pay it out until all parties agree.

If the dispute drags on, the position does not change quickly. If a brokerage holds a deposit for two years and it is still not clear who is entitled to it, the deposit goes to RECO, which also pays out only on consent or a court order. Consumer deposit insurance, up to $200,000 per claim, does not cover deposits that are simply in dispute.

Do not hold back money you owe under the agreement. Paying a deposit late or withholding it can itself breach the agreement. Whether you lose the deposit, or face a further claim from the seller, depends on the wording of your agreement and the facts, so a lawyer should review it.

Options buyers commonly explore

Your lender's reason matters. Ask in writing why the approval changed, because the fix depends on it.

• Another lender or broker. Different lenders have different rules. For CMHC-insured mortgages, the purchase price must be below $1,500,000, and permanent residents can use all CMHC homeowner insurance products with no minimum period of residency.
• Newcomers. Non-permanent residents need legal authorization to work in Canada, such as a work permit. A down payment from 5% applies, at least one borrower or guarantor needs a credit score of at least 600, and alternatives such as an international credit report may support limited Canadian credit.
• A larger down payment. Below 20% down, you will typically need mortgage loan insurance. A non-repayable gift from a relative is a traditional down payment source.
• Registered accounts. An FHSA and the Home Buyers' Plan can be used together for the same qualifying home if you meet the conditions at the time of each withdrawal. An FHSA withdrawal that fails a condition is taxable, and the Home Buyers' Plan limit is currently $60,000.
• An extension or amendment. The seller must agree, and any change should be in writing and signed by everyone. A lawyer should draft it.

Whether a seller agrees to an extension is up to the seller. Asking early gives more time for everyone.

Mistakes that make things worse

• Ignoring the problem until closing day.
• Taking on new debt or changing jobs while financing is pending.
• Telling the seller you will not close before getting advice.
• Withholding the deposit or other required payments.
• Agreeing to a deal change verbally rather than in writing.

What to do next

• Read your agreement and any waiver or amendment you signed, and note the closing date.
• Contact your lawyer straight away and share the lender's letter.
• Ask your lender or mortgage broker for the exact reason in writing.
• Apply to other lenders as soon as possible.
• Review how much you can add to your down payment, including gifts and registered accounts.
• If you need an extension, ask in writing and have your lawyer prepare it.

Frequently asked questions