Another important term to be aware of when it comes to real estate and conveyancing, in general, is “subject to finance.” This term has important things to say about the nature of the transaction that will happen involving property. Here’s some information on this phrase, including its implications and important things to know about it.
Subject to Finance Overview
The term “subject to finance” simply means that the buyer is making an offer on a property that has a stipulation attached, namely that the transaction will only go through if purchaser’s loan is completely approved without conditions. This is often a safer way of doing business if you aren’t exactly sure whether your finances are going through, or simply if you would rather be on the safe side.
Why People Choose a Subject to Finance Approach
The main reason for adding this into a contract is so you can cancel the agreement without any kind of financial or another type of penalty. This is important for peace of mind since you never know whether something will go wrong that forces you to have to pull out of the deal. Maybe your situation changes at the last second, for example. Perhaps you find out something about the finances that you didn’t know before. This way, if the finances don’t work out, you’re still in the clear.
Signing a contract without this kind of out is only a good idea if you already have the money and can just transfer it directly without having to worry about whether a loan goes through.
Important Things to Note About Approval
You must be aware of the difference between “pre-approval” and “approval,” because the former just means that you have been approved personally, and not that the land or property you’re planning on purchasing has been approved itself. This is a different level, and you should really wait for the full approval.
It’s also worth pointing out that you will generally have a specific day as part of the contract where the subject to finance approval will activate. At this point, you only have two days after that date, and then the contract flips back to unconditional. What this means essentially is that the terms of subject to approval are actually only temporary. They exist to hold your contract as conditional only as long as they apply, and then they go away completely.
There’s always the fine prints to worry about as well, since the exact terms of valuation and finances in the contract may be nuanced. That’s why it’s important to always make sure that you get help from a lawyer before signing anything. They should be able to translate and fine details of the contract for you and let you know if anything about the contract is out of the ordinary or suspicious in any way.
Subject to finance is not the only condition that many contracts have. It’s also often a good idea for others to be in there such as making it subject to an inspection of the house, which is called “subject to inspection.” Additionally, it’s common to also add in a “subject to valuation” condition as well. This means that the house should be valued close to what the seller is asking for it. A third-party will do an independent valuation in order to make sure that this is the case.
All of these conditions combined will mean that you have some leeway when it comes to the final purchase. In other words, a lender that’s using valuation may fail to give you a loan if the value is deemed to be far below the asking price by the seller. If you have all of these conditions in there, you will have the added flexibility of being able to stop the proceedings if the subject to finance condition fails. That way, you won’t end up with property worth much less than what you bought it for, which could potentially be a serious financial liability for you in the long run.
This is the reason why this approach is often a good idea.
If the Finance Doesn’t Go Through
If the worst happens, and you don’t get the financing that you applied for, you will have a number of different options based on the situation and the people involved. For example, purchasers can ask for more time from the seller in order to try to get funding from some other source. Obviously, the seller doesn’t have to agree to this, and if they don’t, the contract is completely voided.
It’s important to be careful about all of this due to the fact that you can be liable for damages if the contract becomes unconditional due to your finances actually being approved and you still don’t make the purchase due to having insufficient funds. If this happens, you would be in breach of contract and your seller may take you to court.
In other situations, you could actually simply lose your deposit on the property. This should be fully avoidable, however, as long as you make sure that you follow the language of the contract carefully and make sure that your loan and everything else is in order. You’ll want to know exactly when the full amount of the purchase needs to be available so that you can make sure that money is in the right place at the right time after your loan goes through.
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