What does ‘subject to finance’ mean?
Subject to finance means that the transaction will pend until the buyer’s finance has been approved by a lender. This is common when a prospective buyer has fallen in love with a property however their finances have not yet been pre-approved by a lender. It would be in this instance that the buyer makes a written offer with this clause when their loan has not been approved in time. Should their loan not be approved, the buyer can opt out of the sale generally with no legal or financial liability.
When can a ‘subject to finance’ clause be used?
It must be clearly understood that subject to finance cannot be used in all purchasing scenarios. For some sale circumstances such as private sale or off-market sale, this clause be used unlike an auction where all bids are unconditional.
On auction day you are bidding under the hammer so you must have your pre-approval in place prior to making an offer in these circumstances. For private sales and off-market sales, subject to finance can generally be used, unless the agent has stipulated that unconditional offers will only be accepted. This may be a request by the vendor.
The clause must clearly set out the protocol of how purchaser must inform the vendor if failure of obtaining finance occurs and the options to end the contract.
What are the risks and downsides?
If you have paid a deposit and haven’t been able to obtain finance prior to the expiry date of the finance clause condition, then the contract may become unconditional. This means that should you not settle the contract, the vendor can sue you for a breach of that contract. Not only will you lose your deposit but you can be liable for other additional costs.
Importance of Pre-Approval
When making an offer subject to finance, it is common for a seller to prefer and accept an unconditional offer over a conditional offer. Even in instances where a subject to finance offer may be greater in price than an unconditional offer, some sellers want the guarantee in knowing that they are selling to a party that has finance approved and in check. This shows you the strength of a pre-approval and the advantage that it provides compared to not having your finances approved.
If you are setting out on your property journey and wish to find out what is possible, be sure to get in contact with the team at 40 Forty Finance to explore your options.