Bidding without a financing clause: what you are risking
Published on 3 min read
In short
What the financing clause does, what happens if your mortgage falls through, and when dropping it can be defensible.
In a tight market you hear it from every direction: bid without a financing clause, or you will not stand a chance. It does make your offer stronger. But it also gives up the only way out you had if the financing falls through.
First calculate roughly what you can borrowWhat the financing clause does
In the purchase agreement you agree a period within which you can cancel the purchase if you cannot arrange the mortgage. If it does not work out, you say so within that period and substantiate it, usually with refusals from lenders.
So within that period you can walk away. After it, you cannot. That is exactly why sellers like an offer without the clause: for them the sale is certain straight away.
What happens if you leave it out
Then the purchase is final the moment you sign, even if the financing falls through later. You are in default. The purchase agreement usually sets a penalty, often a percentage of the purchase price, and the seller can claim actual losses on top of that.
You end up with the worst of both worlds: no house, and a bill. This is not a theoretical risk; it happens with valuations that come in low, with properties a lender will not finance, and with income that is assessed differently than expected.
When it can be defensible
There is one situation in which dropping the clause is manageable: when your financing is effectively already settled. That means your borrowing room has been calculated with the standards that apply at the time, that your income has actually been assessed rather than estimated, and that you have enough of your own money to absorb a disappointing valuation.
And even then it is not only about you, but about the property. A ground lease, an owners' association with an empty reserve fund, foundations with a history, or a listed building with obligations: all of these are reasons a lender can say no to a buyer who is perfectly fine in themselves.
What you need in place beforehand
A calculated maximum mortgage based on that year's standards, not on a rule of thumb. Your documents complete: income details, and your figures if you run your own business. A sense of what the property is worth, not only what is being asked for it. And clarity about what you can pay from your own money if the valuation comes in below your offer.
Only when those four are in order does the conversation about the clause become a judgement call rather than a gamble.
Alternatives if you are unsure
It is not all or nothing. There is a whole range in between, and sellers turn out to care more about certainty than about the word clause. Three things that help in practice:
Shorten the period instead of dropping the clause. Four weeks instead of six gives the seller almost the same certainty while you keep your way out. With your documents ready in advance that is perfectly doable.
Say what you are putting in yourself. A seller who knows that a substantial part comes from your own money rates the risk of the financing falling through lower. And they are right.
Have your adviser confirm it. A short written note with your offer, saying that your situation has been calculated and what still has to happen, often does more than leaving the clause out altogether.
And sometimes the honest answer is that this house is too expensive for you. An unwelcome conclusion, but cheaper than the alternative.