Should I make an offer subject to finance?

Submitted an offer and on track to sign a contract? For many Aussies, buying a home is one of the biggest purchases they’ll ever make. When you’re ready to hand over a deposit, you may want to consider whether to add a subject to finance clause to the contract of sale. Including a subject to finance clause can help protect you if things don’t work out with a lender.

What does subject to finance mean?

A subject to finance clause gives the purchaser the opportunity to arrange a home loan for the property they’re hoping to buy. This clause includes a date that indicates when the finance clause must be satisfied.

If your application for a loan isn’t approved or is rejected by the date specified in the contract, a subject to finance clause allows you to back out of the sale without legal or financial penalty.

It’s not standard to every contract, and the seller of the property will need to agree to having a subject to finance clause added. Additionally, contracts for sale for homes sold at auction in Australia are usually unconditional, so you often don’t have the option to include a subject to finance clause or any other clause for that matter. There may be other circumstances where subject to finance clauses can’t be added, so it’s may be worthwhile discussing this with the sellers agent or solicitor.

If you don’t include a subject to finance clause in a property sale contract as a potential buyer, you could risk losing your deposit or potentially being sued for the difference between your agreed-upon purchase price and the lower selling price if the vendor is forced to sell for a lesser amount.  

How does a subject to finance clause work?

Before you can include a subject to finance clause in a property sales contract, the seller must be happy to make the sale subject to finance. As part of this clause, you’ll also need to agree a timeframe that indicates the date when you expect to receive the outcome of your application for finance. The most common timeframes are a 7, 14 or 21-day finance clause. Be sure to check whether the ‘days’ refer to calendar days, not business days.

In addition to the timeframe for approval, a standard finance clause usually includes:

• The name of the lender, or you can insert ‘buyer’s choice’ if you haven’t finalised your lender
• The amount of the loan
• The loan term and interest rate, although this isn’t always needed

When it comes to writing a subject to finance clause, it’s essential to be specific to avoid any potential misunderstandings. It can be a good idea to engage a legal professional, like a solicitor or conveyancer to draft or review the contract before you sign on the dotted line. They’ll be able to help you add in a clear subject to finance clause and should also be able to identify any potential clauses that could work against you and in the seller’s favour instead.

What if I don’t include a subject to finance clause?

Once you’ve signed the contract of sale and paid your deposit for a home, the contract becomes legally binding. If you’re not able to get financial approval from a lender and you haven’t included a subject to finance clause in the contract, you’ll be forced to proceed with the sale. This could mean:

• Losing the deposit that you’ve already put toward the house
• You might also face legal action for breaching your contract for the sale of the property
• Depending on the terms of the contract, you might be required to complete the purchase or compensate the seller for any damages they incur due to your inability to close

If you can't secure financing but still have to proceed with the purchase without a subject-to-finance clause, you might be forced to find alternative ways to fund the purchase. This could include using personal savings, borrowing from family or friends, or even seeking a different form of financing, like a personal loan.

What if I have conditional approval?

If you’re looking to buy a home, you may want to consider getting conditional approval for a loan up to a certain amount. As part of this process, your lender will consider your income, debts and expenses to determine your borrowing capacity.

While getting conditional approval isn’t an essential part of the home buying process, it does offer a few benefits to prospective buyers, not to mention peace of mind. But don’t be fooled, just because a lender has given you conditional approval, it doesn’t mean that your finance is guaranteed to be approved with them. You will still need to complete a full application and there are a number of different factors that can affect the final outcome of your home loan application, including:

• Changes to your personal circumstances including change to income, expenses and liabilities
• Changes to government regulations or lender policies
• Mismatches in information you have previously provided and verification documents
• A negative valuation of the purchase property
• A change in the property’s condition

With this in mind, you may still wish to consider including a subject to finance clause in your contract of sale even if you’ve been granted conditional approval. Learn more about conditional approval here.

Speaking with a solicitor or conveyancer can help you frame your subject to finance and contract correctly. Learn more about contract of sales and key elements included here.

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍