If you’re purchasing property “subject to finance”, it’s important that you understand exactly what that means; how the bank or lender’s letters of offer work, notification obligations if finance is ultimately not granted and the bank’s (or lender’s) terms and conditions for providing the finance.
At David Davis, we can review the contract and ask if you’re getting finance for the purchase. Many people assume this would be part of the contract anyway. We often hear people say that finance is already organised because the bank has given them verbal approval and all they are waiting on is a letter of conditional approval of finance.
In the current uncertain economic climate, you need to be more aware of “subject to finance” clauses now than ever before and we’ve identified three key things you should be aware of before you sign the contracts.
1. How do ”subject to finance” clauses work?
Although “subject to finance” clauses are quite common, many people are not fully aware of how they work.
Some clients assume that they don’t have to tell us when finance has not been approved by the due date because they think the contract will be cancelled automatically.
However, the vendors must receive written notice of the failure to obtain finance otherwise the contract will become unconditional. This means the purchaser will still be required to complete the contract or else they would get sued for failing to settle on time. So, if they cannot secure finance from another source, by settlement date, they could find themselves in significant financial difficulty.
2. A ‘letter of approval of finance’ is not a guarantee of finance being provided
Clients sometimes think that their finance has been approved when they receive a letter of approval of finance, however, this is merely confirming finance is conditional upon the clients satisfying specific requirements.
You may think that this letter means you can allow the contract to become unconditional. However, when the bank’s conditions are not met, then the bank will refuse the finance.
The most common condition the bank requires is that the property valuation will satisfy the bank’s requirements. With the current uncertain economic climate, there will always be some uncertainty as to what the actual market value will be. So, if the valuation is less than the contract price, the bank will refuse finance which could be a disaster for you.
With many businesses either operating in a reduced capacity or not actually operating at all, the bank will most likely increase the conditions required for finance approval and make them more open-ended than ever before. Because of this, finance approval may be even more conditional than before and, in some cases, could be withdrawn for various reasons outside of the control of purchasers.
We review, thoroughly and carefully, the bank’s letters of offer and diarise the time limit dates so we can keep track and keep our clients advised before the contract becomes unconditional. This way, they can make informed choices before the contract becomes unconditional.
COVID-19 special conditions see ambiguity with “unconditional finance approval”
Recently, we have seen that even after banks have confirmed unconditional finance approval, they still add a COVID-19 condition to their loan documents that says they can still cancel the finance at any time before settlement because of the pandemic. This may mean that contrary to any pre-COVID-19 finance arrangements, it would appear that “unconditional finance” might not be so unconditional after all.
3. Auction contracts do not have a “subject to finance” clause
The third thing is even more important when clients want to purchase a property at auction. Auction contracts do not have “subject to finance” clauses.
At David Davis, we make sure that our clients are aware of the absolute necessity of arranging finance well beforehand and the problems they could face if things go wrong.
In some instances, we have seen where agents have changed contracts for private sales to become auction sales. Purchasers can then be signed up within the 3 days before and after auction dates without having the “subject to finance” clause in the contract. This means the auction sale will become unconditional and not subject to finance.
Getting the right advice
Using a lawyer experienced in property transactions (conveyancing) will ensure your property purchase is highly protected. We review contracts very thoroughly (particularly in the current uncertain times) and keep you informed throughout the entire process.
We also review up to 3 sale contracts and s.32 vendor statements FREE of charge because not everybody finds that dream property first time. Find out more about our special conveyancing deal here.
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