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What is the subject to finance clause?

If you sign a contract to buy a house that's subject to finance, you're protected if you can't get a home loan and the deal falls through.

Subject to finance is a term you often see in a home buying contract. A subject to finance clause gives you the option of terminating your contract and getting your deposit back even if you can't get a home loan. This can be a lifesaver if you're buying a home and your finance falls through.

Do you need a subject to finance clause?

A subject to finance clause is a fairly standard inclusion in a property contract. It's also incredibly important.

It’s common practice to purchase a property before having your home loan completely sorted. Lenders don't process an entire application until there's a property that acts as security. And while it's a good idea to get pre-approval before you start the buying process, home loan pre-approval is not a guarantee.

Even if you have a pre-approval, any number of hurdles can come up between pre-approval and unconditional approval. It's never a 100% guarantee.

A subject to finance clause serves to protect you in the event that your lender decides not to go ahead with the home loan. It’s crucial that you make sure this clause is included in your contract, unless you’re 100% certain your home loan is in order.

Subject to finance clauses are especially important if there’s any doubt about a property’s valuation. Once you’ve signed a contract to buy a property, your lender will conduct a valuation. If this valuation comes in lower than expected, they could decide not to extend you credit for your purchase, or to offer you a lower loan amount. Without a subject to finance clause, you could be caught having to make up the shortfall.

What should you look out for in a contract?

While subject to finance clauses are important, not all are created equal. While one clause could protect you and your deposit money, another could end up being used as a weapon to pursue you for damages should your purchase not go through.

Pay attention to the following:

  • Wording. A subject to finance clause states that you as the purchaser will take all reasonable steps to acquire finance. If you don’t pay attention to the wording, those “reasonable steps” could put you in an unreasonable position.
  • Specificity. The clause shouldn’t just make a general statement about obtaining finance. It should state that the purchase is subject to obtaining finance with satisfactory terms. It could even go so far as to state that the purchase is subject to obtaining finance from a specific institution at an interest rate not higher than a specific amount. This protects you in the event your preferred lender doesn’t approve your home loan.
  • Expiry. You should also pay attention to when the clause expires. Most subject to finance clauses have a certain time and date by which finance must have been obtained. Again, if you don’t have your home loan sorted by this time and date, you will have breached the clause.

How do you breach a subject to finance clause?

The clause will have conditions that you need to meet, including getting your loan approved (or not) by a certain time.

You have also committed to buying the house on the condition of finance, so if you decide to pull out for other reasons, you may not be protected and could lose your deposit.

Because you're legally obligated to buy the property, the seller could force you to go ahead with the purchase. You could also incur costs if you pulling out of buying the property has implications on the seller. For example, if they were relying on the funds to purchase their next property.

Be sure to check the wording and specificity of the clause to ensure you're protected.

How do you know you’re protected?

Ultimately, you shouldn’t rely on your own assessment of a subject to finance clause. It’s crucial to seek out legal advice when buying a property. Have a solicitor examine the contract to ensure it provides the protection you need.

The fees you pay to a good solicitor will, of course, add to the cost of purchasing your home. However, making certain you’re protected in the event something goes wrong with your finance could save you untold costs in the long-run.

How long is the subject to finance clause?

The subject to finance clause typically gives you 14 days to secure finance. It can be as much as 21 days, but can also be as few as 10 days. Read your agreement carefully to make sure you have enough time. If you're worried you need more time, you can try to negotiate. 21 days is usually the maximum, however.

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