We are full into spring home-buying season after what was already an unusually busy 3 months, I thought I’d delve into the subject of subject free offers.
If you truly want to go in subject free because you believe it’ll be the only way to land your dream home, then please ensure that you take note of the below in addition to of course having conversations with your realtor and your mortgage broker (in this case me):
- You have more than 20% down and I don’t mean 21%, I mean 25 – 35% down payment.
- You have a really good understanding of what the worst-case scenario will be and that worst case scenario could be that you lose your deposit and a lawsuit ensues and you’re ok with that.
- If you can’t get the financing through A lender, B lender or even Private Lender then perhaps you have the Bank of Mom & Dad who can give you the money to complete on the home.
- You have at least 1.5 months till closing date so that if something does go wrong with the property then we have time to figure out a solution. It’s important to note that a lot of lenders require that all conditions be met 10 business days in advance of closing!
- You have access to the home before you write up the offer and you order an appraisal AND an inspection which is completed in advance of you going in subject fee. Appraisals will cost anywhere from $300-$400 and look at any non-conforming issues, structural issues and economic life. A lender won’t be lending on a property if the remaining economic life is less than 15 years.
As a broker the reason why, we stress so much that a client shouldn’t be going in subject free is most clients wouldn’t have the stomach or the means to deal with the above. And lots of times it’s not that the lender doesn’t love you it’s cause they don’t love the property.
If you have less than 20% down don’t ever consider going subject free because really the biggest challenge is that you’ll require an insurer for your purchase and although we have lots of lenders there are only 3 insurers. And if there’s something that they don’t like about the property and they can’t get on board you’ll be left to walk away from the contract and as mentioned above could lose your deposit or even be sued for breach of contract.
In the current environment many properties are going over asking and the insurer can ask for an appraisal and if that appraisal comes in under what the purchase price is, do you have the extra funds to make up that difference? Most people that have less than 20% down payment have just enough to make the transaction happen not extra.
This is even more important for stratified homes such as condos/townhouses as most lenders will be reviewing the AGM Minutes and if there is a red flag that they feel uncomfortable with they won’t move forward.
Sometimes for a detached home where there are no minutes it’s what the lender sees in the inspection report or appraisal, is there old plumbing and electrical systems? Does it conform to today’s requirements? If not, the lender can say no to that property. If you have the funds to get it up to spec they might say yes, they still might say no.
And please, please ensure that if you are going to still go ahead and make an offer subject free ensure that you are fully pre-approved, and your file has been underwritten. What does that mean? It means that your broker (in this case me) has reviewed your paystubs, your NOAs, your down payment, your credit etc. It means being open and up front about everything in your file so that we can limit the surprises that may or may not come up once the lender reviews your file and the subject property.
If a bank has pre-approved you and it took less than 5 minutes, don’t count on it being an actual pre-approval especially if they’ve never asked you for a single document and all they asked was for your income and multiplied it by 5 or 6. The piece of paper they gave you is a rate hold and even that isn’t a guarantee!
In short if you can avoid going subject free I would.
As always if you have any questions, I’m here for you and if you know of anyone who might benefit from this information, feel free to share it with them or have them reach out to me.
Stay safe and healthy,
Kimberly