Subject to Finance Clause
Written by Domenica Caridi
Edited by Sam Ferraro
Are properties purchased at auction subject to finance?
Generally, no but in theory you can negotiate such a clause! In a private sale you can negotiate a subject to finance clause with the vendor.
This is different to a cooling off period, which you’re not entitled to when buying at auction.
The difference between a cooling off period and a finance clause
A cooling off period allows you to withdraw from the Contract of Sale and you don’t have to provide any reason or evidence even if you just change your mind; however, the vendor is entitled to retain an amount equal to 0.2% of the purchase price.
Under the finance clause, you can only withdraw if your loan is not approved by your lender.
In this case, the vendor may request evidence that your loan was declined.
If you exchange contracts without a finance clause and your formal approval falls through, you could lose your deposit and the vendor can sue you for damages.
How do both clauses work together in a sales contract?
Let’s say the sales contract included a 3-day cooling off period and 14-day subject to finance clause.
The finance clause deadline would take into account the cooling off period.
So, if you were to sign a contract on 8 June, the cooling off period would expire by 11 June if the 3 days are all business days, and the 14-day finance clause would expire on 22 June.
When subject to finance clauses go wrong
Some people wrongly believe that a pre-approval means that their home loan has been approved yet there are many reasons you can be declined for formal approval, such as the property value coming in under the contract price value or it doesn’t meet the lender’s policy due to location or its unique nature.
Failure to submit an application and to provide adequate notice to the vendor before the deadline is considered a breach of contract.
A letter from your mortgage broker advising that finance has been declined is generally not acceptable. It must be from the nominated lender.
Failure to notify the vendor that you have been approved for your home loan before the deadline is another potential breach.
Golden tips for finance clauses
Before signing a Contract of Sale, ensure that you have home loan pre-approval.
If you don’t specify a lender in the finance clause, you must apply with a lender that’s acceptable as per the conditions of the contract, which typically means you can’t simply insert the name of your mortgage broker.
If your lending institution has told you it will take 7–14 days for approval, don’t agree to 7 days in your contract. Similarly, don’t agree to 14 days because your approval may come through on the afternoon of the fourteenth day. The better strategy is to agree to a 16, 18 or 21-day finance clause which gives you time to request a subject to finance extension if you need one.
Property valuation delays due to tenants not allowing access, the bank requiring further paperwork for your mortgage application and lengthy backlogs with the assessment team are usually considered adequate reasons for needing a finance clause extension.
Some sellers may be willing to negotiate an extension but others won’t if they believe they could quite easily sell the property to a ready buyer.
Don’t be influenced by the vendor or their real estate agent to move the finance approval date back.
Keep the pressure on the banks or, better yet, use a mortgage broker to fast-track your home loan application on your behalf.
We can guide you through the home buying process from pre-approval, to contract exchange, and all the way to settlement.
Golden tips for vendors
If you’re selling your home and buying a new property, you should avoid committing to the new property until the sale of your property has become unconditional, that is, not subject to finance.
You will know when the sale becomes official because the buyer’s conveyancer/solicitor confirms in writing that the contract is unconditional.
If you’re borrowing to buy a home, you’re putting yourself at risk if you don't specify "subject to finance and valuation" in the contract. Don’t be forced into a purchase or lose your hard-saved deposit because you didn’t understand these conditions.
WATCH OUT FOR THESE COMMON MISTAKES
People often get themselves into trouble when they:
incorrectly believe finance has been approved when it hasn't been
don’t insist on getting a valuation condition in the purchase contract
unintentionally let the finance condition lapse.
BE CAUTIOUS OF PRE-APPROVAL
Be aware that ‘pre-approval’ or ‘conditional approval ’ doesn’t mean that your loan has been approved. These terms are only an indication from that your financial institution that they are likely to approve your finance after you’ve applied for a home loan, if everything else is correct.
GET A VALUATION CONDITION
Making your offer ‘subject to satisfactory valuation’ isn’t a common condition in a purchase contract. It’s an important one to think about- even if the real estate agent discourages it.
Don’t wrongly assume that you don’t need this clause as the bank won’t lend you the money without a satisfactory valuation. If you’ve got enough equity in other properties (that the bank has security over), a bank may still lend you the money, even if the property is significantly undervalued. You’d then have to go ahead with buying the property, whether you wanted to or not.
You’ll need to organise an independent valuation yourself.
By getting a well-worded valuation condition in your contract you’re giving yourself options. You’ve got the power to decide if you go ahead with the purchase, regardless of whether or not the bank approves your finance.
The takeaway point here: you decide whether to go ahead or not.
DON’T LOSE YOUR DEPOSIT
If your finance isn’t going to get approved in time, you need to get a finance extension. You’ll need to get this in writing from your solicitor. If you don’t get an extension you may have to proceed with the purchase. This may result in you losing your deposit and being sued for the difference if the seller loses money when they re-sell.
Also keep in mind that changing your mind about the purchase and not proceeding with the application for finance is different from applying and not getting approval. You won’t be able to use a subject to finance clause to withdraw from a sale if you simply change your mind. It only protects you in the event of your finance application being refused.
PROVIDE PROOF IF YOUR LOAN IS REFUSED
If your loan doesn’t get approved, you’ll need to notify the agent in writing within two days of the date stated in the sale contract. If you forget to do this, you’ll forfeit your right to pull out of the sale. You may be asked for a letter from the bank stating that a finance application was made and refused.