You may have seen the phrase ‘subject to finance’ in a sales contract, whether you’re buying a unit, a house, a car or a caravan, but what exactly does it mean and does it have any legal standing? Read all you need to know about ‘subject to finance' clauses with Savvy.
What exactly does ‘subject to finance' mean?
A sale contract with a ‘subject to finance’ clause means the sale is conditional upon the stated finance being approved. If the named bank or lender doesn’t approve the finance that has been applied for (namely your mortgage), the contract for sale can be cancelled due to the lack of finance approval without the buyer’s deposit being forfeited.
‘Subject to finance’ clauses are seen most commonly in contracts to buy property, but they are also included in car sales, caravan sales or any other sale where a real estate agent, car dealer or third party is involved in the sale process. They allow the buyer time to arrange full loan approval without the fear of losing their deposit.
‘Subject to finance’ mistakes to avoid
Your ‘subject to finance’ clause shouldn’t be too vague. You should name the financial institution you are applying for a loan with in the clause and add details about the size of the loan and the interest rate you’re expecting. This gives you protection in case the lender does approve your loan, but for an amount or with an interest rate that isn’t satisfactory for you. That’s why it’s important to state the contract is conditional upon receiving a satisfactory finance offer.
If I’m unable to get my loan approved, how do I cancel the sales contract under a ‘subject to finance’ clause?
Under a ‘subject to finance’ clause, you’re obliged to take ‘reasonable steps’ to obtain the finance as detailed in your sale contract. If you’ve taken all reasonable steps and have been turned down for your loan, and have no other means of continuing with the purchase of the property, you should notify the vendors as soon as possible in writing that you wish to terminate the sales contract.
You will need to provide your reason, being specific in the wording of the reason for your withdrawal, and request the return of your deposit. Your real estate agent should be able to provide you with a form containing the necessary wording if you are required to withdraw from a property purchase.
Does ‘subject to finance' still apply if I have pre-approval for my home loan?
Yes – this is because pre-approval for a loan is not the same thing as full loan approval and doesn’t guarantee that you’ll be successful in obtaining finance. It’s estimated that around 8% of loan applications are ultimately rejected after pre-approval has been granted. Reasons for rejection after pre-approval has been granted include:
- the borrower’s circumstances change between pre-approval and loan application (for example, the borrower reduced the hours they work or disclosed they were pregnant and would be giving up work)
- the pre-approval period had expired (pre-approval is usually only granted for a three-month period)
- the lender uncovered information they were not previously aware of when they granted pre-approval (for instance, they subsequently found out the borrower had been declared bankrupt)
- the borrower was unable to provide satisfactory evidence or proof as requested by the lender (for instance, a borrower claimed they earned a salary of $95,000 when they applied for pre-approval, but subsequent payslips showed their salary was nearer $80,000)
- the lender’s loan criteria, lending policies or interest rates change in between pre-approval and full loan approval
What other ‘subject to…’ clauses should be included in my home purchase offer?
To offer you full protection against any unforeseen circumstances that may give you cause to cancel your offer to purchase, you may also wish to include the following ‘subject to…’ clauses in the sale contract you sign:
- Subject to building inspection (to give you time to arrange a building inspection to make sure the property has no structural defects)
- Subject to a pest inspection (especially important if the house is built on wooden supports and/or is located in a high termite risk area)
- Subject to independent evaluation (your lender may insist on an independent valuation of the property you are proposing to buy before approving your finance)
- Subject to sale (of another property, if you are selling one house and buying another in the same transaction, and the second one is dependent on the first sale taking place successfully)