What does subject to finance mean?

Imagine this. You find the perfect property, sign the contract and hand over your deposit. But then you struggle to be approved for a home loan. It can be a homebuyer’s worst nightmare – especially if the cooling-off period has ended. At this point, if all other conditions agreed between the buyer and seller have been met the contract of sale can become unconditional, which means all parties are legally bound by the contract and must go ahead with the sale.

Having a ‘subject to finance’ clause included in the sale contract before you sign it, can help you avoid the unpleasant situation of making a mad dash to secure a home loan just to proceed with the sale. And if you’re scrambling against the clock to arrange finance, you could be less likely to select the loan that’s right for you.

The solution – and a smart way to protect yourself, is to make your offer subject to finance.

What is ‘subject to finance’?

When a home sale is ‘subject to finance’, it means the contract has a clause saying the transaction won’t proceed until the buyer’s home loan (or finance) has been approved by their lender. If the loan isn’t approved by the date specified under the clause, the prospective buyer can usually opt out of the sale; generally without legal or financial liability.

When to arrange a ‘subject to finance’ clause

Before you make an offer to buy a home it is sensible to have your solicitor or conveyancer review the contract of sale before you sign on the dotted line. That way you can be made aware of any clauses that may work in the seller’s favour – and against you.

This is also a chance to speak to your legal representative about adding a subject to finance clause. It isn’t usually something that is standard to every contract, and the seller of the property will need to agree to having a subject to finance clause added.

Bear in mind that contracts for homes sold at auction in Australia are usually unconditional, meaning you generally won’t have the option of a ‘subject to finance’ clause.

How a ‘subject to finance’ clause works

If the seller is happy to make the sale subject to finance, you will need to negotiate a timeframe in which to secure a loan. For instance, a 14 day subject to finance clause means you have 14 days from the time you sign the contract to organise a mortgage, though you may be able to negotiate an extension.

How does ‘subject to finance’ protect a homebuyer?

Making your offer subject to finance means that if you cannot get approval for a home loan within the specified time, you can normally walk away from the sale without being left out of pocket.  You will usually be able to receive your deposit back in full. You will generally need to have made a finance application and had it refused – a subject to finance clause can’t be used to back out of the purchase if you simply change your mind about the property. It is different to a cooling-off period.

What happens if I don’t make an offer ‘subject to finance’?

Once you have signed the sale contract and paid your deposit, the contract becomes legally binding, and if you cannot find a lender who will offer you a home loan, you could be left financially worse off.

You could lose more than your deposit. If the seller ends up selling the home for less than you agreed to pay, you could potentially be sued for the difference.

What happens if I receive finance approval?

If you receive finance approval from your bank or lender, then it’s important to notify your solicitor of this as soon as possible, so that they can notify the seller’s solicitor or conveyancer before the finance condition date. If you have not received approval by the finance condition date due to a hold up on your bank or lender’s part, but you strongly feel as if you will receive it, you may be able to speak to your solicitor or conveyancer about requesting an extension to the finance date – if the seller is amenable to this, you may be able to negotiate an extension to allow for some extra time for finance to be approved.

What happens if I don’t receive finance approval?

If you have not received adequate finance approval – whether it’s the case that your bank or lender is unwilling to approve your application at all, or is only willing to approve you for less than you required – then you will need to notify your solicitor or conveyancer, who will inform the seller’s side of this before finance condition date. As long as the other side is informed before the condition date, you will likely be able to terminate the contract and receive a refund of your deposit.

What if I have home loan pre-approval?

Home loan pre-approval (also known as conditional approval) can be a useful

With pre-approval in place, you have a better idea of your buying budget and greater confidence that you’ll get the green light for a home loan when you have found the right place to buy.

The downside of home loan pre-approval is that it does not provide ‘unconditional’ approval. In other words, finance is not 100% guaranteed. You could still be knocked back for a loan when you have found a property to buy. This could happen for a variety of reasons, including the bank changing its lending criteria, or because interest rates have increased.

So even if you have home loan pre-approval, making your offer on a property ‘subject to finance’ can still be a wise move.

For anyone who needs to take out a loan to buy a property (and that’s probably most of us), it can be a worthwhile precaution to make your offer ‘subject to finance’. Your legal representative can be a valuable source of advice here, helping you frame your offer appropriately, and explaining exactly what your rights are if your efforts to obtain home loan finance fall through.

Cover image source: fizkes/Shutterstock.com.