Subject to Finance Meaning: What Home Buyers Need to Know

A Subject to Finance Clause Links the Purchase to Loan Approval

A subject to finance clause is a condition in a purchase contract that gives the buyer a period to obtain finance. The clause may set out the finance amount, approval date, nominated lender or other requirements that need to be satisfied before the contract becomes unconditional. The way a finance clause works depends on the contract conditions. A solicitor or licensed conveyancer may explain the buyer’s rights, any required notice and what happens if finance is not approved by the date stated in the signed contract. A finance clause may refer to:

• the loan amount or finance amount being sought

• the lender or financial institution involved

• the finance date or approval deadline

• whether written evidence or written notice is required

• what happens if the finance condition is satisfied, extended or not met.

The clause is sometimes described as a safety net, but it does not necessarily provide unlimited protection overall. The wording of the contract matters, and different contracts may place different responsibilities on the buyer.

Pre-Approval Is Not the Same as Final Finance Approval

Pre-approval may help a buyer estimate the loan amount a lender may be prepared to consider based on the information available at that time. It does not normally mean the lender has given unconditional approval for the purchase of a specific property. Once a buyer has a property in mind, the lender may need to complete further checks before giving final loan approval. A buyer who is pre-approved may therefore still need to submit an updated loan application, provide further documents or wait for the lender to assess the property. There are several stages a buyer may hear about:

• Pre-approval: an early indication of the amount a lender may consider.

• Conditional approval: the lender has assessed the application but still requires certain conditions to be met.

• Unconditional approval: the lender has completed its assessment and confirmed approval, subject to any remaining settlement requirements. (16 words)

• Settlement: the stage when the property transaction and loan funds are completed in accordance with the contract.

A lender approving a borrower in principle does not necessarily mean it will approve every property at the same purchase price. The lender may consider the borrower’s current financial situation, the proposed loan, the property and any other information required under its lending policy. This distinction may be particularly important when an offer is subject to finance. The finance condition in the contract and the lender’s approval process are separate matters, even though they are closely connected.

The Finance Period Gives the Lender Time to Assess the Application

The finance period is the time allowed under the contract for the buyer to obtain finance. Its length and the due date depend on the contract, and the approval deadline may be an important detail to consider before a property purchase. Once the contract has been signed, responding promptly to lender requests may help keep the finance application moving. Delays in supplying documents or answering questions may make it harder to reach a decision before the finance date, although providing information quickly does not guarantee approval. During the finance period, a lender may review:

• income, employment and regular household expenses

• savings, the available deposit and existing debts

• the requested loan amount and purchase price

• the type, location and valuation of the property

• the interest rate and repayments used in its assessment.

The lender may also request more recent information if the buyer’s circumstances have changed since pre-approval. A mortgage broker may help a buyer understand what documents the lender is requesting, follow the progress of the loan application and explain outstanding lending conditions. The broker cannot change the approval deadline in the property contract, and contractual timing questions may be discussed directly with the buyer’s solicitor or conveyancer.

Property Valuation May Affect Finance Approval

A lender may arrange a valuation of the specific property before giving final approval. The lender uses this valuation as part of its assessment of the property being offered as security for the home loan. A low valuation, where the lender’s valuation is below the agreed purchase price, may affect the amount the lender is prepared to provide. Depending on the buyer’s circumstances, this might mean a larger contribution is required or the proposed loan needs to be reconsidered.

For example, a buyer may agree to a purchase price based on what they are comfortable paying, while the lender arrives at a different value for lending purposes. If the lender will only provide finance based on its valuation, some buyers may consider reviewing the available deposit, loan amount and other available options. A valuation condition in a loan approval is also different from a finance clause in a sale contract. One forms part of the lender’s assessment, while the other forms part of the property contract.

If finance falls short because of the valuation or another lending condition, the buyer’s options under the contract depend on its wording. Professional legal advice may explain what notice may be required under the contract and by what date.

Conditional Offers Require Attention to Dates and Wording

An offer subject to finance is different from an unconditional offer. With a conditional offer, the finance clause included in the contract may need to be satisfied before the transaction becomes unconditional. An unconditional contract generally does not give the buyer the benefit of an outstanding finance condition. That may create additional risk for someone who still needs a home loan to complete the property purchase.

The meaning of finance approval may also be clarified by checking the contract wording. For example, a bank stating that an application is progressing is not necessarily the same as the approval required under the contract. Because these questions involve contract interpretation, a solicitor or conveyancer may provide advice on the contract rather than the buyer relying only on discussions with estate agents, the lender or the broker.

A Mortgage Broker May Help Manage the Lending Process

A mortgage broker may help potential buyers compare available loan options from the lenders available to the broker and understand how those lenders may assess an application. This may include discussing interest rates, repayments, deposits, loan features and the information needed for finance approval.

The broker may also help prepare and submit the finance application, respond to lender questions and explain the difference between pre-approval, conditional approval and unconditional approval. Approval still remains subject to the lender’s assessment, and using a broker does not guarantee that finance will be obtained by a particular date.

Understanding the Finance Position Before Committing

The main subject to finance meaning is straightforward: the purchase is linked to the buyer obtaining finance under the conditions written into the contract. The practical detail is more important, including the loan amount, approval deadline, notice requirements and whether the lender has provided conditional or unconditional approval.

Some potential buyers may consider reviewing their budget, discussing home loan options with a broker and obtaining legal guidance about the property contract before making any final property commitment. Eurobodalla Finance may help buyers compare loan options from its panel, prepare a finance application and understand how panel lenders may assess their circumstances, subject to lender assessment and individual eligibility. This article provides general information and does not take into account your objectives, financial situation or needs. It is not personal or legal advice.