If you’re borrowing to buy a home, you’re putting yourself at risk if you don't subject it to finance and valuation. Don’t be forced into a purchase or lose your hard-saved deposit because you didn’t understand these conditions. The Successful Investor’s Michael Sloan explains the key things to know about finance and valuation conditions.

Give me the main points

  • ‘Subject to finance’ conditions are really important. They protect you if you can’t go ahead with a property purchase.
  • ‘Subject to valuation’ conditions aren’t as common as finance conditions. They help keep the purchasing power in your hands.
  • The wording of finance and valuation clauses can be tricky. Always get independent legal advice before signing anything.
  • ‘Pre-approval’ from a bank doesn’t mean you have guaranteed finance, so don’t take chances. Make sure the purchase contract is conditional upon you getting finance.
  • It’s easy to lose your deposit if you don’t follow the finance conditions. Read the fine print carefully and be diligent with the dates to give notice.

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 estate agents when determining your contract’s finance conditions. Their involvement is often self-serving and not in your interests. Estate agents get a commission from selling properties.

The estate agent isn’t paid if you pull out of the contract. So it’s common to find estate agents wording the finance condition in an effort to minimise a purchaser’s chance to withdraw from the sale.

Be wary of the agent 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’s been approved. Those terms are only an indication from your financial institution after you’ve applied for a home loan, that they are likely to approve your finance if everything else is correct.

You may find yourself getting pressured by the 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 losing 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 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.

Important information

The information in this article has been written by Michael Sloan from The Successful Investor. While Mr Sloan has been careful to ensure the information is correct and accurate, Mr Sloan’s views are his own and do not necessarily represent those of National Australia Bank Limited ABN 12 004 044 937, AFSL and Australian Credit Licence 230686 (NAB). This information should not be relied upon as financial product advice as none of the information provided takes into account your personal objectives, financial situation or needs. NAB recommends seek the counsel of an independent financial advisor before making any investment decision.

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