If you’re borrowing to buy a home, you’re putting yourself at risk if you don't specify "subject to finance and valuation" in the contract. Don’t be forced into a purchase or lose your hard-saved deposit because you didn’t understand these conditions.
What ‘subject to finance’ means
Making your offer ‘subject to finance’ is a standard condition in home purchase contracts. This clause gives you time to organise a loan for the property you’re buying. It means that if your loan application is refused, you may choose to end the contract and not go through with the sale.
Like other contract conditions the wording of subject to finance clauses can cause serious problems, so it pays to be careful.
Use a solicitor that understands offer conditions
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. 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.
Watch out for these common mistakes
People often get themselves into trouble when they:
incorrectly believe finance has been approved when it hasn't been
don’t insist on getting a valuation condition in the purchase contract
unintentionally let the finance condition lapse.
Be cautious of pre-approval
Be aware that ‘pre-approval’ or ‘conditional approval’ doesn’t mean that your loan has been approved. These terms are only an indication from that your financial institution that they are likely to approve your finance after you’ve applied for a home loan, if everything else is correct.
You may find yourself getting pressured by the real estate agent into signing an unconditional contract as you believe you're safe with finance. But, if the finance isn’t approved by your bank, you may find yourself being forced into proceeding with a purchase you can’t afford or lose your deposit.
Get a valuation condition
Making your offer ‘subject to satisfactory valuation’ isn’t a common condition in a purchase contract. It’s an important one to think about- even if the real estate agent discourages it. Don’t wrongly assume that you don’t need this clause as the bank won’t lend you the money without a satisfactory valuation. If you’ve got enough equity in other properties (that the bank has security over), a bank may still lend you the money, even if the property is significantly undervalued. You’d then have to go ahead with buying the property, whether you wanted to or not.
You’ll need to organise an independent valuation yourself.
By getting a well-worded valuation condition in your contract you’re giving yourself options. You’ve got the power to decide if you go ahead with the purchase, regardless of whether or not the bank approves your finance.
A suggested valuation condition
Here are some examples of valuation conditions that'll help keep the control in your hands.
‘The offer is subject to satisfactory valuation’, or ‘subject to a valuation within 5% of the purchase price’, or ‘subject to valuation at or above offer price.’
‘If the offer is not to their satisfaction, the purchaser(s) may (at their option) terminate this contract by written notice. Supported by a copy of the report, to the vendor’s agent prior to the date of 14 days from acceptance.’
The wording ‘satisfactory valuation’ means that you get to decide whether you go ahead with the purchase based on the valuation. You may still want to proceed with buying a property despite a low valuation because you think it’s worthwhile purchase. The takeaway point here: you decide whether to go ahead or not.
Don’t lose your deposit
If your finance isn’t going to get approved in time, you need to get a finance extension. You’ll need to get this in writing from your solicitor. If you don’t get an extension you may have to proceed with the sale. This may result in you losing your deposit and being sued for the difference if the seller loses money when they sell.
Also keep in mind that changing your mind about the purchase and not proceeding with the application for finance is different from applying and not getting approval. You won’t be able to use a subject to finance clause to withdraw from a sale if you simply change your mind. It only protects you in the event of your finance application being refused. Provide proof if your loan is refused
If your loan doesn’t get approved, you’ll need to notify the agent in writing within two days of the date stated in the sale contract. If you forget to do this, you’ll forfeit your right to pull out of the sale. You may be asked for a letter from the bank stating that a finance application was made and refused.