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 if 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.
Looking for your
next property loan?
Contact propertyloans@realrenta.com and we will arrange
for a lending specialist from our trusted finance partner to contact you
shortly
Marlene Liontis
Sunday, 1 December 2019
