Frequently Asked Questions

Your Condition of Finance (COF) Questions Answered

The Condition of Finance (COF) is an important part of mortgage success. We’ve had a couple of questions around this topic. Many ask why you would need a COF if you’re pre-approved, so we’re going to outline the answer to this, and other questions we’re frequently asked around the COF, step-by-step. The team at Mortgage Allies specializes in being transparent with our clients, and we need to be able to provide you with tools and resources that will keep you informed. We want you to be equipped with more than enough information to make the best possible mortgage decisions.

  1. Pre-approvals are typically not underwritten by mortgage lenders, most mortgage lenders will simply issue a pre-approval certificate based on the information clients provided to the lender.
  2. Even if underwritten, pre-approvals cannot cover a particular property itself, because the client has not found a property yet.
  3. Thus, at best, a pre-approval can only cover the financial aspects of the borrowers and not the real estate itself.
  4. The mortgage industry is not educating clients sufficiently to help them understand the severe limitations of pre-approvals, so most buyers believe that a pre-approval guarantees them a mortgage or that they already have a mortgage.

The COF period is designed to facilitate the borrowers’ final mortgage approval and this entails the lender’s complete evaluation and approval of the borrowers and the purchased property. We hope this has answered your question around needing a COF even while being pre-approved.

Let’s move on to the next question.

The COF serves many purposes, but from the purchaser’s perspective, it mainly provides them with protection in the following ways:

  1. The ability to opt-out of the purchase if the final mortgage is declined.
  2. The ability to opt-out of the purchase if their approved mortgage is undesirable.
  3. The ability to opt-out of the purchase if the purchasers cannot fulfill their lender’s mortgage conditions.
  4. The ability to opt-out of the purchase if the lender declines the purchased property itself.
  5. The ability to negotiate on the purchase price or opt-out of the purchase if the property is under-appraised.
  6. It gives the purchaser time to review their mortgage and mortgage conditions before they commit to the purchase.
  7. The purchaser has time to review and sign the full set of mortgage documents before they commit to the purchase.
  8. The purchaser has the time to seek legal advice before committing to the purchase.

These points flesh out why the COF is necessary, especially from the purchaser’s point of view.

It usually takes less than a day to get a mortgage approved, but there is a lot more to protecting a client than just getting a piece of paper with the word “approved” on it. The Condition of Finance (COF) allows the purchaser to deal with the majority, if not all, of their mortgage risks by the time they exit or fulfil their Condition of Finance.

A conscientious Mortgage Broker should cover at least the following during the COF Period:

  1. Get the mortgage approved. The timeframe here is normally within one day.
  2. Get the lender to review and sign-off on all the clients’ primary mortgage support documents.
  3. Order the appraisal and have the lender accept the appraisal. Timeframe: normally 3 days.
  4. Prepare and review the mortgage documents with the client.
  5. The client signs and returns the mortgage documents.
  6. Return the signed mortgage document to the mortgage lender.

Why not use the COF for what it is intended to do? Let us assist you where need be.

The appraisal is very important from a borrower’s perspective since all mortgage lenders will base their mortgage financing on the LOWER of the purchase price and the appraised value of the property. So how does an under-appraised property affect a borrower; here is an example:

Property Purchase Price: $800 000
Property Appraised Value: $750 000
Shortfall: -$50 000

Here is another example to help you through the thought-process. The seller still wants $800k, as per the Purchase Agreement, but the lender will only mortgage the property based on the appraised value of $750k. What happens to the difference between the appraised value and
the purchase price of the property? Explain how that is handled?

To continue with the mortgage the borrower is responsible for their minimum down payment AND the shortfall between the two values. Let’s see how this affects the client:

Client’s planned down-payment: $80 000
Client’s actual down-payment: $30 000 (Down-payment after shortfall is deducted)

By law, the minimum down payment for a property value of $750k is $50k.

With this in mind, think about the following questions:

Does this client have enough down payment now to still qualify for the mortgage?
Does the client still qualify for the mortgage based on their Total and Gross Debt Service Ratios?
Does the client have a choice to withdraw from the purchase at no cost or negotiate on the purchase price if the appraisal is only completed after the COF?
If a client cannot close their mortgage, who is at risk?

  1. The purchaser may suffer financial loss and legal exposure
  2. The seller suffers loss, because they may have purchased and are dependent on the proceeds of the sale of their home and therefore cannot close their new mortgage.
  3. Other buyers/seller downstream from the purchase/sale suffer loss because they cannot close on their real estate transactions.
  4. Lenders suffer loss because they are not compensated for the work they have done to arrange the mortgage.
  5. The realtor suffers loss because they are not compensated for the work they have done.
Therefore, the case can fairly easily be made that a COF clause in a Purchase & Sale Agreement can avoid or at least minimize most of the above risks and is in the best interest of all parties, not just the purchaser. Our question is why is there an insistence that buyers should remove their COF if they want to be competitive in a demanding housing market? 

We hope we’ve been able to add value, and take you through the answers to some of the most prevalent questions around the COF. Get in touch with us today – we’d love to help you on your way to getting the best mortgage.

Disclaimer

The above comments are made to help the borrower understand the appraisal process and are based on Mortgage Allies’ experience and are not specific to any appraiser or appraisal company or service. Comments and processes may vary between lenders, properties, appraisers, mortgage insurers, mortgage rules etc. and are subject to terms and conditions and change without warning.