Subject To Finance Rules - What They Are & What You Should Know

Subject To Finance Rules

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Subject To Finance Rules

Many purchases assume that a ‘subject to finance’ clause is a standard matter whereby if their finance falls through, the purchaser can end the Contract of Sale.

This of course is not always the case so it is absolutely vital that the purchaser of a property understands ‘subject to finance’ clauses if they are to be utilised correctly for your purchase.

What Does "Subject To Finance" Mean?

‘Subject to Finance’ is a special condition in home purchase contracts.

This clause gives the purchaser time to organise a loan for the purchase of the property you’re bidding on or making an offer for. It means that if the purchasers loan application is refused, they may choose to end the contract and not go through with the sale.

The subject to finance clause tells the vendor that you legally agree to the purchase on the condition that you receive formal home loan approval from your bank.

It protects you from losing your deposit or being sued for damages by the vendor should your loan be declined. 

In Victoria, you need to request that a finance clause be included in the contract of sale.

There will typically be an entire page dedicated to the finance clause.

But like other contract conditions the wording of ‘subject to finance’ clauses can cause serious problems, so it pays to be careful.

Why You Should Be Careful With A “Subject To Finance” Clause

Every vendor needs certainty that the property they have for sale, will be sold and when the hammer has gone down, has been sold.

However a sale that is “subject to finance” can fall over if the purchaser’s attempt at finance does not go through. This has a consequence whereby the vendor cannot guarantee that property has actually sold until the sale becomes unconditional.

It is quite common for purchasers to make mistakes when determining whether a contract has become unconditional. An unconditional contract means that the sale must proceed. If the purchaser defaults on the contract because finance is not available, the vendor may be entitled to force the purchaser to proceed, or to forfeit the purchaser’s entire deposit and to sue for damages for breach of contract.

There might also be some additional costs. Remember, many vendors are purchasing another home themselves and this can affect their finance for that other purchase. If the purchases finance falls through this could mean that the vendor may in turn default on their second purchase the loss and costs may also be claimed.

What Are The Most Common Mistakes With Subject To Finances Clauses?

Mistakes occur when the buyer mistakenly thinks that financing has been approved, or when they inadvertently let the financing conditions lapse. The most common examples of these mistakes are:

  • A purchaser believes that the financial institutions pre – approval means the loan has actually been approved. A purchaser needs unconditional finance approval.
  • If the purchase does not settle, the purchaser will lose their deposit and may be sued by the vendor for damages for breach of contract and be liable for any additional costs incurred by the vendor.
  • Purchaser being influenced by the vendor or Real Estate agent before finance approval.
  • Purchaser should ensure their finance application is actually made to the lender.
  • Not requesting a finance extension if needed.
  • Purchaser wrongly believes that all of the lender’s requirements have been met.
  • Purchaser allows finance condition to lapse because of the above mistakes.
  • Finance conditions lapse because purchaser fails to give required notice, or late notice.
  • Finance conditions fail because purchaser fails to pay deposit when due.

How It Works

The finance condition appearing in most contracts of sale and contract notes prepared on behalf of a vendor will require 3 items of information:

  • The name of purchaser’s intended lender.
  • The amount the purchaser needs in order to proceed with the purchase.
  • The date by which the purchaser expects to receive confirmation of unconditional approval.

The finance condition is ordinarily governed by General Condition 3 of the standard Contract of Sale of Real Estate, which states that the purchaser may end the contract if the loan is not approved by the approval date only if the purchaser:

  • has made immediate application for the loan;
  • has done everything reasonably required to obtain approval of the loan;
  • served written notice ending the contract on the vendor on or before two business days after the approval date; and
  • is not in default under any other condition of this contract when the notice is given.

If the purchaser meets these criteria then all money must be immediately refunded to the purchaser if the contract is ended.

Any purchaser who is borrowing in order to complete the purchase of real estate must ensure that the purchase contract is made “subject to finance”.

A purchaser who is relying on finance to purchase, and who does not include a finance condition in the contract is exposed to serious risk, and may be forced to proceed with the purchase, or forfeit the deposit or 10% of the purchase price, as well as being sued for the vendor’s loss and costs.

A cooling-off period of three clear business days applies to private sales of residential property. The cooling-off period gives you time to consider the offer. The cooling-off period does not apply if: the property was purchased at a public auction or within three clear business days before or after a public auction the property is used mainly for industrial or commercial purposes the property is more than 20 hectares and used mainly for farming you previously signed a contract for the same property with the same terms the buyer is an estate agent or corporate body.

A purchaser should always obtain legal advice from a qualified lawyer regarding the correct use of the finance special conditions, including advice as to the circumstances where it may expire or otherwise become ineffective.

Always Use A Solicitor That Understands Offer Conditions

As a rule of thumb there are certain aspects of the purchasing process where you can get advice from other parties. Select Legal advises that you should avoid getting advice from real estate agents when determining your contract’s finance conditions. Their involvement is often self-serving and not in your interests. You must remember that Real Estate Agents get a commission from selling properties.

The real estate agent isn’t paid if you pull out of the contract. So it’s common to find agents wording the finance condition in an effort to minimise a purchaser’s chance to withdraw from the sale.

Be wary of the agents who seems extra helpful in getting your finance conditions prepared for you. They may take the opportunity to minimise the finance period or alter the giving notice period, meaning your contract becomes unconditional without you even realising it.

Select legal, give specialised legal advice and are experts in Real Estate Law as well as Conveyancing, please seek our advice over Estate agents as we serve ‘you’ our client first and foremost.

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