What does subject to finance mean
When you get into real estate, you'll often hear the phrase 'subject to finance', especially during the negotiation phase of a home purchase. But what exactly does this mean?
What is "subject to finance"?
During a property sale, you'll often see a "subject to finance" clause in the sale contract. This means the transaction will not proceed until the buyer has received a home loan approval from a lender. If the buyer can't get their home loan application approved within the finance approval date specified in the clause, the buyer may opt out of the sale.
How does a "subject to finance" clause work?
Usually, the seller and buyer will agree on a timeframe for the "subject to finance" clause. It can be anywhere from 14 to 21 days, or longer, depending on what the buyer and seller discuss. During this time, it's expected that the buyer will organise and finalise a mortgage. If they can't do that within the agreed timeframe, they may forfeit the property or negotiate for an extension.
Why is a "subject to finance" clause important?
For buyers, including this clause may provide additional protection if they are unable to obtain finance within the agreed timeframe.
If the home loan is not approved by the lender, you may be able to withdraw from the purchase before the finance date without penalty, subject to the contract terms. The “subject to finance” clause is a layer of protection in the stage between signing a contract and securing a home loan.
A sale contract without a "subject to finance" clause could mean serious financial consequences. Once a contract becomes legally binding, failing to secure a home loan means the buyer may likely lose their deposit. Additionally, the buyer may be held responsible if the seller has to resell the property at a lower price to a different buyer.
Where is the “subject to finance” clause in a contract?
When you make an offer on a property, the details are typically formalised in in a written sales contract, where you would usually have the option to specify whether the offer is “subject to finance”. You may want to consult legal advice to make sure the finance clause is included.
Once the contract becomes unconditional, this typically means the buyer and seller are bound by the terms of the contract and are expected to proceed with settlement.
This means if the buyer's loan is declined, they are still financially responsible for the purchase of the property. Usually, they will have to apply for another home loan.
Is getting a pre-approved home loan useful?
A pre-approved home loan can help buyers when submitting a formal home loan application to the same lender. Since a pre-approved home loan acknowledges that the lender is willing, in principle, to lend a certain amount to a buyer, it could make the home loan approval process easier.
You can get pre-approved for a home loan online with loans.com.au! Simply fill out the form, and we’ll get back to you as soon as possible.
Find out in under 2 minutes if you qualify for one of our home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
