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.

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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.

In all likelihood, you would go to an auction or enter into a private treaty sale after getting pre-approval from a lender. While it’s very smart to get pre-approval, it isn’t an ironclad guarantee. Any number of hurdles can come up between pre-approval and unconditional approval.

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.

What happens if you breach the subject to finance clause?

Woman signing a contractIf you breach the subject to finance clause you risk losing your deposit (if you have already paid it). And because you are legally obligated to buy the property, the vendor could force you to go ahead with the purchase. On top of this, they can also sue you for breach of contract, making you liable for damages and court costs.

This could add up to an overwhelming financial burden very quickly. For instance, if the vendor was counting on the funds from the sale to buy another property, they could pursue you for any losses resulting from their purchase falling through.

This is why it’s incredibly important to pay attention to the subject to finance clause, and to ensure it provides you adequate protection. And it also underscores the necessity of having your contract scrutinised by a conveyancer or solicitor. A legal expert can help you make sense of the contract and suggest alterations if you're not adequately covered.

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.

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