You’ll typically find that the average person requires finance from a bank or lender when buying a property, especially when it comes to first home buyers.
If finance is not approved at the time the contract is signed or the purchaser is not a cash buyer, a finance condition is included in the contract as a measure to safeguard the purchaser. This condition states that the contract is ‘conditional’ on, or ‘subject to’, the purchaser being lent a specific minimum loan amount.
By having a contract of sale drawn up with a ‘subject to finance’ clause included, it enables the purchaser to withdraw from the contract if they are unable to obtain the necessary finance to purchase the property. Read on to learn more about what this condition entails or speak to one of our experienced conveyancers if you have any questions. You can also check out our tips on buying your first house.
Overview:
- What is ‘subject to finance’?
- How to tell if finance has been approved
- How long does ‘subject to finance’ take?
- Can finance be unconditional, but still have conditions?
What is ‘subject to finance’?
‘Subject to finance’ is a common clause in real estate transactions, meaning that the contract of sale is contingent upon the purchaser obtaining approval for their home loan (also known as finance). If the purchaser’s loan application is not approved, they can withdraw from the sale without penalty. This clause provides a safeguard for buyers, ensuring they are not committed to purchasing a property without securing the necessary funds.
Obtaining finance is one of the critical first steps in buying a house. The process involves several key stages:
- Pre-Approval: Before making an offer, buyers often seek pre-approval from a financial institution. This preliminary approval gives an indication of how much they can borrow, based on their financial situation.
- Finance Application: After the sale contract is signed, the buyer must formally apply for a home loan. This involves submitting detailed financial information to the lender, who will assess their ability to repay the loan.
- Conditional Approval: The lender may grant conditional approval, which means the loan is approved subject to certain conditions, such as a satisfactory property valuation or further verification of the buyer’s financial details.
- Unconditional Approval: Once all conditions are met, the lender provides unconditional approval, confirming that the buyer has secured the necessary funds to proceed with the purchase.
The finance clause included in the sale contract will specify a finance approval date, by which the buyer must obtain satisfactory finance approval. If the buyer fails to secure finance by this date, they must serve written notice to the seller or the seller’s solicitor, and the contract will be terminated without any legal action.
Including a ‘subject to finance’ clause in the purchase contract is a wise move for buyers, as it protects them from financial risk. Real estate agents often liaise directly with mortgage brokers and financial institutions to facilitate the finance approval process, ensuring that all finance conditions are met within the specified finance period.
Buyers should take reasonable steps to obtain finance approval promptly to avoid delays in the settlement date. Failure to obtain finance approval can result from a variety of factors, including changes in personal circumstances, fluctuations in interest rates, or issues with the property valuation.
Is pre-approval still subject to finance?
It’s important to note that pre-approval does not mean your loan has been approved. It merely means that your financial institution is likely to approve your finance after you’ve applied for a home loan. So in your contract of sale, you should still include a subject to finance clause for security.
How to tell if finance has been approved
“Has finance been approved yet?”
This is the question key parties (the purchaser, the vendor, the real estate agent, and the conveyancers) want answered when a contract for sale includes the condition of ‘subject to finance’.
For this to happen, the purchaser needs to obtain finance approval in writing, on terms and conditions acceptable to the purchaser. This could include ‘conditional’ or ‘unconditional’ approval, depending on the agent’s contract template used.
Once finance has been approved by the lending institution or bank, notification will be given in writing to the purchaser, conveyancer and agent. Once this happens, finance has “officially” been approved and the contract becomes unconditional—meaning that the purchaser can no longer rely upon the finance condition and must proceed with the purchase (subject to any other conditions being included).
Unconditional approval is then usually granted once the banks have met their standard for supporting documents (payslips, ID etc) and have conducted a valuation of the property/acceptable security, and are satisfied with it against the lending amount.
How long does ‘subject to finance’ take?
This depends on several variables such as the workload of the financial institution, the complexity of the transaction and the time it will take for them to arrange their valuation. It is best to check with your financial institution or mortgage broker so that you can apply the right time frame to the contract condition.
If a purchaser becomes aware that finance is unlikely to be approved in the ‘subject to finance’ timeframe, it may be possible for them to try and see if the vendor and/or their agent will agree in writing to an extension or variation of the finance clause.
Can finance be unconditional, but still have conditions?
One point we’d like to draw your attention to, is that when a purchaser receives a finance approval in writing, the ‘subject to finance’ condition is deemed satisfied and it doesn’t matter whether there are conditions included in the approval or not.
In other words, once ‘subject to finance’ approval has been received in writing, the purchaser will be bound by the contract and obligated to fulfil the requirements therein, notwithstanding that the lender may subsequently withdraw the approval.
South Australian real estate agents should also note that it depends on which contract template is being used for the contract:
The REISA (Real Estate Institute of South Australia) contract states that it doesn’t matter whether it’s conditional or unconditional approval (even if it includes numerous conditions) it is deemed to satisfy the condition of the contract.
The Society of Auctioneers and Appraisers contract isn’t as specific as the REISA contract and simply mentions that approval received in writing satisfies the condition. So it comes down to what conditions the purchaser is willing to accept in the approval. I believe that conditional written approval provided by the purchaser or their bank or loan broker would be taken as satisfying the finance condition.
When ‘subject to finance’ can’t be used
Some purchasers incorrectly presume that if they include a ‘subject to finance’ clause, and are then unable to obtain finance for the property purchase, that the contract is simply cancelled and that they will have the deposit they paid refunded to them.
‘Subject to finance’ clauses typically contain a special condition stating that the purchaser will use their best endeavours to apply for and do everything necessary to obtain the loan. In the event that the purchaser fails to meet this requirement, for example by not even trying to apply for a home loan, the vendor may then choose to take legal action against the purchaser. Trying to use the ‘subject to finance’ clause to get out of an unwanted purchase is not what this clause is intended to be used for.
Of course, everything discussed above only applies to sale by private treaty. When buying a property via auction, purchasers are buying the property on an unconditional basis and need to make sure they have their finance in place prior to bidding.
If you are buy-side and have any further questions about ‘subject to finance’ clauses in South Australia or you’re a vendor and need assistance with selling a property, speak to the expert conveyancers at Eckermanns. You can also take advantage of our Eckermann Assist service for any questions out of hours.
