‘Subject to finance’ Clauses and Conditional Loan Approval explained
Subject to Finance Clauses
Subject to finance is a term in property purchase contracts which allows you time to organise the finance for your purchase. It essentially means that you have the option to put an end to the contract if a loan for the property cannot be obtained by an agreed due date. Although time and time again clients misunderstand how the ‘subject to finance’ clause works.
There is an assumption that if purchasers do not obtain finance approval by the due date, then the contract is automatically at an end and that their deposit will be returned.
However, it is not this simple and there are risks involved. The ‘subject to finance’ clause includes a general condition which specifies that the purchaser will use its best endeavours to apply for and do everything necessary to obtain the loan. If this term is not satisfied by the finance approval due date, the contract may still become unconditional. You must also be aware of special conditions in your contract which can alter the general position.
Therefore, it is essential that you stay in touch with your lawyers/conveyancer and broker with any updates so that they can protect your interests and provide advice on the most appropriate course of action. If the vendor and agent is not updated within the required time parameters, there may be grounds that you have waived and forfeited the right to rely on the finance clause and therefore, the contract will become unconditional.
If the contract becomes unconditional and your finance has been rejected, you may be forced to pursue other avenues to secure a loan and it may prove to be a struggle to find alternative finance in time for settlement to avoid being in default.
The best way to avoid this is to keep in touch with your broker and lawyer/conveyancer with any updates regarding the purchase and finance approval ensuring that everyone is on the same page and therefore, can take necessary steps and measures required in the matter.
In the instance that the loan is refused the agent must also be updated 2 days before the subject to finance clause expires, the special conditions of a contract can however alter this general position. You may also be required to provide a formal letter from the bank stating that the finance fell through.
Conditional Loan Approval
A conditional approval from a bank or broker means that you should be approved for a home loan up to a certain limit by assessing your eligibility for applying for a home loan in light of your current financial circumstances. A common mistake is that clients view a conditional approval as formal approval of a loan which it is not.
Conditional approval or pre-approval means that you meet the requirements for a loan, not that your loan is formally approved. Generally, a conditional approval is valid for up to only 90 days.
Your lender has the ability to deny your loan application if your circumstances change since you initially received the conditional approval, such as:
- Loss of employment;
- Incurring a debt;
- Recent late payment; and
- Failure to pay any rent in the meantime.
After the conditional approval has been obtained and you find a property you wish to purchase, these are some steps your lender may resort to:
- Must verify the information that was provided in the pre-approval to ensure that you will be able to make repayments; or
- Require you to have the property valued to ensure your home loan does not exceed the value of the property.
It is merely a tool for knowing how much you will likely be able to borrow.
A subject to finance clause only protects you in the event that your finance is refused but it does not account for a change of mind and a conditional approval is not considered to be formal finance approval. These are frequent errors and mistakes clients get caught up in, that is why it is important to know the terms you may be subjected to when entering a contract and the necessity of staying in contact with your lender and lawyer/conveyancer.
Please note that this is a summarised guide on financing for a conveyancing purchase. If your require assistance or need your contract reviewed and are after a representative to act on your behalf in a property purchase, please do not hesitate to contact us on (03) 9942 7790 or alternatively, email our Principal Lawyer, Nick Karolidis at nick@karolidis.com.au for further information.