Subject to Finance

Why buying “subject to finance” can be dangerous.

The first thing to bear in mind is the fact that the vendor wants to be certain that the property has sold. A sale that is “subject to finance” can fail completely if the purchaser’s finance fails, and so the vendor cannot be sure that property has actually sold until the sale becomes “unconditional” (i.e., confirmed, and not dependent on any conditions).

Dangerous mistakes

It is quite common for purchasers to make mistakes when determining whether a contract has become unconditional, with disastrous consequences. Remember, an unconditional contract means that the sale must proceed. If the purchaser defaults on the contract because finance is not available, the vendor may be entitled to force the purchaser to proceed, or to forfeit the purchaser’s entire deposit and to sue for damages.

There may also be flow-on costs. Remember, many vendors will also be committed to a further purchase, and if the vendor defaults on their second purchase the loss and costs may also be claimed.

What are the most common mistakes?

Mistakes occur where the purchaser incorrectly believes that finance has been approved:

• Purchaser believes that “pre-approval” means the loan has been approved.
• Purchaser wrongly believes that all lender requirements have been met.
• Finance condition lapses because purchaser fails to give required notice.

If the purchaser defaults on the contract, and the vendor becomes entitled to a forfeited deposit, the estate agent is entitled to take a commission from the forfeited deposit. Even if the vendor feels inclined to let the purchaser “off the hook”, the estate agent is entitled under the Exclusive Sale Authority to require the vendor to forfeit the purchaser’s deposit to pay a commission to the estate agent.

Pre-approval

“Pre-approval” or “Approval in Principle” are terms used by lenders to confirm finance has been approved subject to the valuation and final assessment prior to the issue of Unconditional Approval.

At most, a “Pre-approval” or “Approval in Principle” mean that the home loan will likely be approved if all the assumptions made by the lender, based on the information provided by the intending borrower, are correct.

A loan that is “pre-approved” or “approved in principle” is a loan that is not yet Unconditionally Approved.

Subject to valuation

“Subject to valuation” is the most typical requirement attached to a conditional loan approval. When a loan has been “pre-approved” or “approved in principle” there is still the condition the bank or lender must accept the security that has been purchased.

Proceed unconditionally?

There are advantages and risks associated with proceeding unconditionally where finance has not been Unconditionally Approved.

The most obvious risk is that the purchaser will be required to proceed with the purchase, even if the application for finance is later rejected. This could result in court action to recover loss suffered by the vendor, and the forfeiture of the deposit (even if a small deposit has been paid, the vendor may be entitled to claim an amount equal to 10% of the purchase price from the purchaser).

Proceed subject to finance?

Proceeding “subject to finance” is the preferable option where finance has not been Unconditionally Approved.

Of course, there is the risk that the property may sell to a purchaser who offers to buy the property unconditionally, but in most cases the vendor will opt for the higher price, rather than a lower but unconditional offer.

Buying real estate “subject to finance” is not unusual, and most contracts have provision for a finance condition.

Conclusion

A loan that is “approved” subject to any conditions is a loan that is not approved.

Even if finance is believed to be certain, unless the lender has provided written confirmation that the loan has been Unconditionally Approved a purchaser should always proceed with caution when purchasing by understanding the market, they are buying in.

Any purchaser who is borrowing to complete the purchase of real estate must ensure that the purchase contract is made “subject to finance”.

A purchaser who is relying on finance to purchase, and who does not include a finance condition in the contract is exposed to serious risk, and may be forced to proceed with the purchase, or forfeit the deposit or 10% of the purchase price, as well as being sued for the vendor’s loss and costs.

Estate agents should never be permitted to prepare the finance condition, or to advise a purchaser on the finance condition.

A purchaser should always obtain legal advice from a qualified solicitor regarding the correct use of the finance condition, including advice as to the circumstances where it may expire or otherwise become ineffective.