What does subject to finance mean?

If you’ve found your dream home and are considering signing a contract, chances are you’ve heard of the term ‘subject to finance’, but what does it actually 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 if I have home loan pre-approval?

Home loan pre-approval (also known as conditional approval) can make a lot of sense when you are buying a home.

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 worth making 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.

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