Throughout the process of buying your property, there are so many intricacies and ins and outs to the process that small but crucial elements can slip your mind. Not to worry – we’re here to make sure you know everything you need in this journey, from applying for your loan to signing your contract.
One of the vital elements that you should be aware of is ‘subject to finance’. Don’t panic if you don’t know what it means. This article will unpack what subject to finance means, why it is important and when you need it. We’ll also share some common mistakes in sales contracts and a brief reminder of how to secure your finance.
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What 'Subject to Finance' Means
Subject to finance is a condition found in a home purchase contract. Essentially, the subject to finance clause means that you are not obligated to go through with the sale until you have finance approval from a lender. Therefore, if your home loan approval is refused, you can end the sale contract. Generally, you can opt out without financial or legal liabilities.
The subject to finance clause might have a time limit by which the seller expects the contract to become unconditional. Most deadlines in NSW are fourteen days. If you cannot seek loan approval within that time, the seller may look for other buyers, and you risk losing the property. The purchaser is typically required to serve written notice to the seller within two days of the date.
The clause will usually include the buyer’s and seller’s names, the purchase price and the date the purchaser expects to receive confirmation of loan approval.
Other stipulations include the requirement that purchasers immediately apply for a home loan, so they don’t deliberately miss out on financing by refusing to apply. Also, the purchaser must do everything reasonably required to get their loan application approved.
However, be wary of the wording of the clause as it can cause further complications if not considered with a solicitor.
The Difference Between a Cooling-Off Period and a Subject to Finance Clause
On the other hand, the cooling-off period usually is around five days and comes after the exchange of contracts and payment of the deposit. This period allows the purchaser to inspect the property and formally settle the home loan.
If you then rescind the contract within the cooling-off period, the vendor is usually liable to retain part of your deposit. Within the cooling-off period, you do not need to supply any evidence or reason for your change of mind.
Under the subject to finance clause, you can only back out of the contract if your loan application is not approved.
By mutual agreement with the vendor, you can waive your right to the cooling-off period and make the contract legally binding immediately. Similarly, you can agree to an extension to the cooling-off period with the vendor.
The cooling-off period doesn’t apply to properties bought at auction or any commercial property. Similarly, a subject to finance clause is also generally not applicable at auction. You usually can only bid with money you already have or an unconditional loan. However, at a private auction, you might be able to negotiate the clause with the vendor.
How Do Both Clauses Work Together in a Sales Contract?
If your sale contract includes a five-day cooling-off period and a two-week subject to finance
clause, the finance clause takes into account the cooling-off period. Both periods start at the same
time, from the moment of signing the contract and run concurrently.
Do I Need Subject to Finance in My House Offer?
It is generally considered to be a sensible idea to include subject to finance clauses in your house offer. When you make an offer on a home, it should always be subject to several conditions. Firstly, that the property passes all its inspections; secondly, that it is worth the money. And thirdly, subject to your loan application approval.
If you don’t include a subject to finance clause in your house offer, then you may be liable to legal action should you not be able to follow through with payment.
Do I Need Subject to Finance in My Contract?
Yes. As your contract is legally binding, it is even more crucial to include a subject to finance clause here. Once all the requirements of the buyer and seller are satisfied and the cooling-off period ends, the contract becomes unconditional. This means that all parties are legally bound, and the sale must go forward.
Without the finance clause in the contract, the buyer risks having to go through with the purchase even if their financing application is rejected. This usually means they will have to apply for another loan. Yet, as they are rushing to meet the approval date in the contract, it could lead to poor decisions or choosing the wrong credit provider.
If they still are unable to get their mortgage application approved, they risk not being able to pay for the property. In such a case, they might lose their deposit and face legal action from the seller.
A subject to finance clause provides some breathing room should your credit provider not give formal approval to your application.
What Should Be Included in a Subject to Finance Clause?
The subject to finance clause usually has to be requested in each state. It is not an automatic inclusion in the sale contract.
The clause typically takes up about a page and must detail the name of the purchaser’s lender, the loan amount needed to go ahead with the property purchase and the expected approval date.
As stated above, the clause is conditional to the purchaser making an immediate application for the loan, having taken all reasonable steps to acquire approval and serving written notice within two business days of the stated approval date. It is also usually required that the buyer is not in default of any other condition of the contract.
The clause will also state that all money must be immediately refunded to the purchaser should the contract end.
Conditional Vs. Unconditional Contract
We’ve been using terms like conditional and unconditional contracts. A brief explanation is that the former has conditions that have to be met before the sale is completed. The latter does not. For example, a contract with a finance clause is conditional. It will only become unconditional when the lender approves the loan.
Beyond the subject to finance clause, there are other conditions that can be included in a contract that prevent the sale from going ahead until all are met. They could be anything, like building and pest inspection clauses. Or, you can negotiate more customised conditions with the seller. For example, you can request that the property be professionally cleaned.
Ask your solicitor to include conditions that you want into the contract. However, be aware that the seller might refuse these conditions, and you risk losing the property if you insist on them.
Once all the conditions on the conditional contract are met, it becomes an unconditional contract. An unconditional contract does not need to wait for anything before it is finalised. Therefore, it is legally binding as soon as it is signed. In essence, conditional contracts are better suited to the buyer, whereas unconditional contracts offer a level of assurance to the seller.
Use an Expert Solicitor
It is best practice for all home purchases to engage the assistance of an expert solicitor. Not only can they word your subject to finance clause to suit you, but they can also warn you of any other aspect of the contract that you should be wary of. Similarly, they will watch out for a clause that states a short period resulting in the contract becoming unconditional before you’re aware.
It is usually best to avoid listening to the advice of your real estate agent at this point in the process. Real estate agents work on commission and won’t get paid if you pull out of the contract. Therefore, they might advise against a conditional contract, but this is not in your best interests. Always consult your solicitor about the wording of the clause.
Watch Out for These Common Mistakes
Unfortunately, including a subject to finance clause isn’t as simple as just adding it to your sale contract. There are many common pitfalls that home buyers fall into, even with finance clauses.
Don't Lose Your Deposit
Don’t mistake pre-approval for unconditional approval. When you approach lenders to secure finance, they often consider your application and offer pre-approval, also known as conditional approval. This usually means that you meet the background checks, credit requirements and finance conditions. However, it is not the same as a formal loan offer.
Therefore, don’t assume that you have the necessary finance for your purchase if it is conditional. Ensure that you have formal approval before making your home purchase contracts unconditional.
Get a Valuation Condition
Most typically, “subject to valuation” is attached to a pre-approved loan. Commonly, the property’s purchase price is the property’s market value, and the valuation condition is met.
However, it can happen that the valuation suggests that the home buyer has paid too much for the property.
In this instance, the lender might consider that the property cannot secure the loan – it cannot be used as collateral if the purchaser defaults on their mortgage repayments.
As with pre-approval, a loan subject to valuation is not an approved loan and not a guarantee of finance.
Provide Proof if Your Loan Is Refused
It is essential that, should your loan be refused, you provide evidence to the seller. You will need to notify your seller in writing within two days of the stated date in your contract. If you do not complete this in time, you lose the right to pull out of the sale should you not provide proof, such as a letter from the bank that details that your finance application was refused.
So, now you might be wondering how you can secure finance. While it is best to include a clause should you not be approved, you still want to minimise your chances of missing out on your dream home. Don’t worry, we’ll briefly take you through how to apply for a home loan and improve your chances of approval.
Consider Talking to An Expert
The first step to take is to consider talking to a professional. Mortgage brokers have a range of connections with lenders and are able to offer you tailored options to suit your needs. They work on your behalf to apply for the particular product you want and ensure that the bank provides you with the best terms you can achieve.
Lendstreet wants to help you make informed decisions about your mortgage. We take you through each step of the process, offering expert advice and personalised solutions to your financial situation. Better yet, we pride ourselves on our fast, efficient and effective services, helping you to get your loan approved before the finance clause is up.
What Is Your Credit Score?
You want to be in the best financial position possible to get your home loan approved. The bank will consider your credit score a key indicator of your financial condition and ability to repay the loan amount. A strong credit score improves your borrowing power and chances of getting your application approved quickly and without fuss.
Make Sure You're Ready
Be prepared. This means having all your financial documents ready to show the lender, including bank statements, payslips, proof of address, tax returns, credit history, and identification.
Plus, ensure that you have your full deposit ready. Your chances of home loan approval often depend on the size of your deposit. Most lenders require a down payment of around 20% of the property value. A larger deposit will often get you lower interest rates, loan terms, and a larger loan amount.
Do Your Research
Make sure to shop around. Don’t settle with the first bank you approach. Look at the comparison rate of different lenders and consider where you might be more easily approved. Also, consider what you are willing and able to pay. Extremely high-interest rates that you struggle to afford over the next thirty years are not worth the home loan.
This is why it is often better to go through a mortgage broker as they do the research for you. They are experts in the field as they know the best lenders to apply to and how to negotiate home loan terms to suit your situation.
Apply Only for What You Can Afford
Make sure you stay within the region of your affordability. One of the main reasons that home loan applications are rejected is because the lenders do not consider that the home buyers are able to afford to repay the loan.
Therefore, stay within your budget. Only apply for loans that you can reasonably be able to pay back. Also, remember your other financial commitments. Don’t spread yourself too thin on your mortgage repayments.
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Including a subject to finance clause in your sale contract is best practice. Ensure you engage the help of your solicitor to finalise the wording of the clause and watch out for common mistakes. To ensure that your home loan application goes smoothly, hire the assistance of a mortgage broker to secure your finance for you.