If you have found a property and are ready to buy, you need to get your finances approved by a lender.
A subject to finance clause tells the seller that you legally agree to the purchase a property as long as you you receive formal home loan approval from your lender.
This is the advantage of gaining pre-approval, as you have proof that a lender will likely offer you a home loan up to a certain amount.
The main reason to include this clause in your contract is it protects you from losing your deposit or being sued for damages by the seller in the event your home loan is declined.
If the home loan is not approved by the lender, you can opt out of the sale prior to the finance date without incurring any financial penalty.
“Subject to finance” essentially is a layer of protection in the stage between signing a contract and securing a home loan.
Without a securing a home loan, you could potentially lose your deposit or face legal action from the seller.
When you make an offer on a property, you must do so in writing. This is called a sales contract and in this contract, you will need to specify the offer is “subject to finance.”
Once the buyer and seller’s requirements have been satisfied and the cooling-off period has ended, the contract becomes unconditional. This means both parties are bound by the contract legally, and must process the sale.
This means if the buyers loan is declined, they are still financially responsible for the purchase of the property. Usually, they will have to apply for another home loan.
You may have to pay lenders mortgage insurance if you don’t have a large enough deposit, take a home loan with a higher interest rate, or search for a loan with a different lender.
It’s important to be specific in your contract, as vague subject to finance clauses can lead to potential downfalls.
Best practice is to specify that the purchase is subject to obtaining finance from the lender at an interest rate not higher than the rate you nominate.
This specifies the finance you need to service the purchase of the property, and protects not only you but the seller as well.
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