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What Subject To Finance means and how does it affect you?

You’ve finally found the house of your dreams and are so ready to sign the contract and start the purchase process. But have you got your finances in order?

It’s time to back up a bit and reconsider the contract before signing it.

First, you need to determine if your loan has been pre-approved by your financial institution. Pre-approval of your loan is based on your financial circumstances such as how much money you have saved for a deposit, your income, your expenses and your financial situation.

When your financial institution pre-approves a loan amount it is usually valid for three to six months giving you the time you need to find a home you want to buy.

Pre-approval means that the lender may approve your loan, but it does not guarantee that they are legally bound to lend you the money. Many factors will determine whether they finalise your loan or not such as whether they approve of the property you plan on purchasing.
This is when a subject to finance clause in your sales contract becomes highly significant to you.

So what is Subject to Finance?

This clause protects you from honouring your written sales contract if your loan is not approved. Often pre-approvals are granted with certain conditions in place. Lenders and financial institutions can still decline the loan based on the property’s valuation which is conducted by your lender once you sign a contract to purchase a property. If the valuation shows that the property is over-priced or if they find that there is something wrong with the property, they could decline the loan entirely or offer you a lower loan amount.

This can land you in a lot of trouble if you do not have a subject to finance clause in your sales contract.

Once all the buyer and seller conditions – as laid out in the sales contract – are met and the cooling-off period has ended, the sales contract becomes unconditional. This means that you are now legally bound by the contract, and so is the seller.

However subject to finance offers usually come with a 14 to 21-day timeframe stipulated by the buyer to finalise their finance and meet other conditions.

In a fast-paced marketplace, like we have today, vendors get anxious to close the sale quickly. A 14 to 21 day waiting period is too long for some vendors.  As a result, they may decide to pursue more viable sales offers such as those with unconditional contracts.

As such it is advantageous for you to put in an unconditional offer.

But how can you mitigate the risks involved?

By being in close contact with your financial institution or lender so that you know exactly where you stand with regards to your finances and how much of a loan will be approved.

Ideally, during the period when inspection of your property takes place, you should ask your lender to conduct an RP Data valuation on the desktop which gives them a good idea of your property. This way they can give you an indication of the loan that they will approve, providing you with the confidence you need to buy the home of your dreams.

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