Co-author: TJ Ryan
Before entering into a contract to purchase real estate, the client must get their finances approved by a lender. If you have not already obtained home loan pre-approval, this involves applying for a home loan and waiting for it to be approved. Sometimes these waiting periods can become lengthy and in order to secure their home, the client may need to sign the contract before their finances have been approved by the lender.
Below, we explain what subject to finance means and when you need to include it in the contract or offer.
When a client first makes an offer on a house, they will be required to make the offer in writing and this is referred to as a ‘sales contract’. In this contract, they are given the option to include a clause that says their offer is ‘subject to finance.’
What does ‘subject to finance’ mean?
If a home sale is ‘subject to finance’, it means that the transaction will pend until the buyer’s home loan (or ‘finance’) has been approved by their lender. If the loan isn’t approved, then the prospective buyer can opt out of the sale; generally without legal or financial liability.
Do I need subject to finance in my house offer?
Yes. Here’s why. When you make an offer, it should always be subject to several conditions: your home loan being approved (subject to finance); the building passing all its inspections (subject to inspection); and the property being worth the money, according to an independent valuation (subject to valuation).
Do I need subject to finance in my contract?
Yes. Once both the buyer’s and the seller’s requirements have been satisfied, and the cooling-off period has ended, the contract of sale will become unconditional. Once this occurs, all parties are legally bound by the contract and must go forth with the sale.
If the buyer does not include a ‘subject to finance’ clause in the contract, and their loan application is rejected, they will be still be bound by the contract to go through with the purchase. This can mean they have to apply for another home loan – and when you’re in a hurry, it’s easy to make unwise decisions like settling for a higher interest rate and more fees.
Why you should get a professional opinion
It is recommended that in order to avoid this circumstance, you hire a professional lawyer or conveyancer to discuss the contract with you and your real estate agent. In the event that the client’s loan comes back unapproved and they are unable to fulfil the contract, the seller has the option of either forcing the buyer to proceed with the sale, or to forfeit the buyer’s entire deposit and sue for damages.
All in all, it’s a much safer bet to get a pre-approved loan from the bank before signing a contract. If this is not available to you, discuss the ‘subject to finance’ clause of the contract with a professional and always read the terms and conditions before signing.
We here at CANSTAR compare over 1,100 home loans from nearly 100 different home loan providers so you can find a loan to suit your particular needs.
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value.
Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning