Financing, Mortgages and Transaction Conditions
What this domain tests
This domain tests how financing shapes a residential deal: mortgage qualification, financing conditions, lender requirements, and the interaction between financing and closing. Expect questions on down payment, debt-service ratios, mortgage types, and what a financing condition actually protects.
Core rules and concepts
- Financing condition protects the buyer if they cannot obtain financing on the stated terms; it must be satisfied or waived in writing by the deadline.
- Qualification turns on income, credit, down payment, and debt-service ratios (gross and total). Lenders also apply a stress test in many markets, qualifying borrowers at a higher rate.
- Down payment minimums vary by price and jurisdiction; mortgage insurance is generally required for high-ratio loans.
- Mortgage types: fixed vs. variable rate; open vs. closed; term vs. amortization. Prepayment penalties differ, especially on fixed-rate closed mortgages.
- Lender conditions: appraisal, property condition, and title insurance or a survey. A lender's appraisal is not a CMA.
- Closing funds: the buyer must have the balance of the down payment and closing costs available and verified; lenders may require source-of-funds documentation.
- Bridge financing covers the gap when a buyer closes before selling their current home.
Worked example
A buyer is pre-approved for $500,000 at 5.5% but the lender's stress test qualifies them at 7.0%. The buyer offers $520,000 with a financing condition at 5.5%.
Reasoning: pre-approval is not a commitment; the lender will apply the stress test at closing. The buyer may not qualify at $520,000, and the financing condition as written may not protect them if the lender approves only at a higher rate. The salesperson should advise the buyer to confirm the qualified amount with the lender and to draft the condition to match the actual terms the lender will apply. The mark is lost by treating pre-approval as a guarantee.
Traps that cost marks
- Treating pre-approval as a firm mortgage commitment.
- Drafting a financing condition that does not match the lender's real terms.
- Confusing the lender's appraisal with a CMA or market valuation.
- Forgetting source-of-funds requirements for the down payment.
- Ignoring bridge financing needs when the buyer must close before selling.