When venturing into property investment, you may come across the term “subject to finance.” It is one of the common conditions of many real estate transactions, but what is it, and how does it affect the process of buying? Let’s break down the details.
What is “Subject to Finance”?
“Subject to finance” is a condition in an agreement that makes the sale of a property contingent on the buyer obtaining finance. If the buyer fails to get a mortgage or all the funds, they will easily get out of the contract without incurring substantial financial penalties.
This condition is advantageous to the buyer, especially when one wants to ascertain the availability of finances before giving a full commitment to such purchases. It is a safety net for buyers to investigate the possibility of getting finance and to avoid potential financial crises. It also reduces the risk of over-extension, which can be adverse to their financial stability in the long run.
For the seller, this sounds good yet at times even a plus; knowing a buyer is serious and has put enough thought into their financial capability. It saves potential headaches or delays you experience at later dates if a buyer fails to secure the funds.
Do You Lose Your Deposit if Subject To Finance?
Aside from circumstances where the deposit becomes forfeited, buyers are concerned about losing their deposit should they fail to secure the funds. Fortunately, on condition that a contract has a subject to finance clause, typically, the deposit is refundable.
If the buyer is unable to secure the required loan and notifies the seller within the set timeframe, the deposit is refundable. Again, you must adhere to the terms in that agreement, failing which you may lose your deposit.
Buyers need to be aware of what the actual wording is and what the date of the deadline is. It is always better to get a lawyer to go through the same so as to understand all of the terms and execution. Thus, this will prevent disputes and also secure the financial interest of the buyer.
How Long is Subject to Finance?
The subject to finance duration varies, however; in general, it goes for a range of 14 to 21 days. This period allows the buyer to apply for and secure financing from their lender.
During this period, the buyer will be asked to prove they attempted to secure finances, which could be a mortgage pre-approval or an application. During that tenure, if the buyer cannot get their finances within the stipulated time, they shall inform the vendor that the deal can either be canceled or re-negotiated.
Extensions to this period can sometimes be negotiated if both parties agree. However, buyers should be proactive in their communications with lenders and sellers to avoid unnecessary delays.
On the other hand, sellers must state all their expectations while being open to reasonable extensions if they feel the buyer is making genuine efforts.
Is Subject to Finance Bad?
The subject to finance clause is not inherently bad; in fact, it can also be quite good for both buyers and sellers. For buyers, this is a form of financial protection against committing to a purchase they cannot afford. For sellers, this means that at least this buyer is serious and committed enough to take concrete actions toward securing their financing.
But to sellers, this may be looked at as some form of gamble since it opens them to an unseen circumstance that may make the sale impossible. Generally speaking, sellers may want to receive offers without strings attached, which means faster, surer sales are achievable. Thus, while the clause protects you, it sometimes makes your offer less appealing in competitive markets.
In hot real estate markets where there are going to be multiple offers, a buyer’s “subject to finance” offers will not be as attractive as a cash buyer or someone who is already pre-approved for financing. However, a buyer has to weigh financial security against the competitiveness of an offer.
Is Pre Approval Still Subject to Finance?
Even when a buyer has mortgage pre-approval, the purchase can still be subject to finance. Pre-approval means the lender has an initial check of the buyer’s current financial position and decides that they are capable of getting up to a certain amount of loan. It does not mean final approval.
Final approval will depend upon the property valuation and/or any changes that might have occurred in the buyer’s financial situation. The “subject to finance” condition, therefore, applies right up until the time that the lender gives the green light.
Meanwhile, clients have to understand that pre-approval is just the initial step. For final approval, further investigation into the financial statement, valuation of the subject property, among others, needs to be conducted. Communicating well with your lender and supplying necessary information at the right time will help smooth this process.
Can You Buy Land Subject to Finance?
Yes, buying land can also be subject to finance. In land buying, particularly for future development, it is even harder than in buying a house that’s already built. Lenders may have even more stringent requirements for loans on land, including higher interest rates and low loan-to-value ratios.
Having a subject to finance clause in the agreement for land purchase allows flexibility in order to make sure the buyers can obtain the finance they need. This comes into effect because the buyer may want to develop the land, in which case they may have to make another application for a loan with regard to construction.
Moreover, the nature of the land, its location, and the intended use can all have an impact on the lender’s decision. More elaborate due diligence may be expected, and buyers need to prepare for a longer approval time. Specialised land lenders would therefore be easier to deal with regarding such matters.
Can You Buy a House Subject to Finance?
It is a regular occurrence for houses to be sold subject to finance. The buyer may commit to purchasing a property provided they obtain finance for it. The inclusion of this clause frees the buyer from some risks in case their application for a loan is not approved.
However, clear communication with the real estate agent and the lender will be absolutely necessary to ensure you fulfill the conditions of purchase within the stipulated time. Misunderstandings can be avoided and the transaction can be smooth with proper documentation and timely communication.
Sellers should know the buyer’s financial status and how far the latter has progressed with their application for finance in order to manage expectations. Regular updates from the buyer about their situation will keep all parties informed and enhance goodwill, resulting in a much more cooperative transaction.
Conclusion
The “subject to finance” clause protects almost each and every transaction in real estate and saves the purchasers from whims regarding house loan searches. While there are many advantages, the contract and the terms involved should be considered with a lot of attention to avoid potential pitfalls.
It is in understanding how this clause functions that both buyers and sellers are able to exercise their capabilities for informed decision-making and enter into property transactions with greater certainty. Whether buying land or a house, knowing “subject to finance” better allows one to pursue dreams of property investment with greater certainty.
Finally, the subject to finance clause is considered one of the important tools at the disposal of any person while performing property transactions with due care. In this way, a buyer will not be over-involved in the purchase and thus spares themself financial stress. The seller can estimate just how serious and genuine their buyers are.
