What is ‘subject to finance’?
When the sale of a home is ‘subject to finance’ clause, it means the sale 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 opt out of the sale, generally without legal or financial fallout.
How a ‘subject to finance’ clause works
If you need a home loan in order to buy a property, it’s generally advisable that any offer you make is subject to finance. This should normally be included in your formal offer, alongside your proposed deposit, settlement timeline, and any other clauses, like a subject to a building and pest inspection clause.
If your offer is accepted, you might want to have your solicitor or conveyancer review the contract of sale before you sign on the dotted line. That way, you can make sure your clauses are included and you’re aware of any clauses added in by the seller.
A subject to finance clause isn’t standard in every contract, and the seller of the property will need to agree to any such clause too.
You’ll also need to specify how long you have to secure finance before the clause lapses, potentially leaving you on the hook. For instance, a 14-day subject to finance clause means you have 14 days from the time you sign the contract to secure unconditional mortgage approval.
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, 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 can’t get approval for a home loan within the specified time, you can walk away from the sale without losing your deposit.
You will generally need to have made a finance application and have it refused for the clause to apply. Unlike a cooling-off period, a subject to finance clause can’t be used to back out of the purchase if you simply change your mind.
What happens if I don’t make an offer ‘subject to finance’?
Once you have signed the sale contract, paid your deposit, and waited out the cooling-off period, the contract will become legally binding. If you don’t have a subject to finance clause and can’t find a lender to offer you a home loan, you could lose your deposit.
If the seller ends up selling the home for less than you agreed to pay, you could potentially also be sued for the difference.
What happens if I receive finance approval?
If you’re approved for finance from your bank or lender, it’s important to notify your solicitor as soon as possible so they can notify the seller before the finance condition expires.
If you haven’t received unconditional home loan approval by the date the finance condition is due to expire because of a delay from your bank or lender but strongly feel you will receive it, speak to your solicitor or conveyancer about getting an extension. If the seller is happy to allow this, you may be able to secure extra time for finance to be approved.
What happens if I don’t receive finance approval?
If your bank or lender rejects your application or is only willing to approve you for less than you require, you can’t likely pull out of the sale relatively scot-free.
Should this happen, notify your solicitor or conveyancer, who will inform the seller’s side.
What if I have home loan pre-approval?
Home loan pre-approval (also known as conditional approval) can give you a better idea of how much you can borrow and greater confidence that you’ll be approved for a home loan when you find the right place to buy.
However, home loan pre-approval is not the same as unconditional approval. You could still be rejected for a home loan after finding a property to buy. This could happen if the bank doesn’t like the property you want to buy, it changes its lending criteria, or interest rates increase.
Even if you have home loan pre-approval, making your offer on a property ‘subject to finance’ can be a wise move.
