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Are you buying a property with finance?

Whether you have “pre-approved” finance or not – things can go wrong. This is how you can protect yourself from risk in your purchase.

What is finance?

Most people purchase property with finance (a loan) from a financial institution (bank or credit union). The financial institution will usually secure the loan with a mortgage on the title of the property. Sometimes people get a loan from family members, which may also involve a mortgage.

What is pre-approval?

It is wise to approach your financial institution or mortgage broker and arrange “pre-approval” for a loan. This gives you a good idea of how much you can borrow. However, “pre-approval” does not mean that the financial institution will actually approve a loan for the particular purchase you ultimately wish to make.

What is a finance clause?

If you require finance, we strongly recommend that you have a “finance clause” in your contract. A finance clause means that the contract to purchase the property will be conditional on your financial institution approving the necessary finance. If you are relying on finance, and do not have a finance clause, you may end up with a contractual obligation to purchase a property and no ability to complete the contract. A vendor may be entitled to enforce the contract against you and claim their losses from you.

When you make an offer to purchase a property, you must say that your offer is conditional on finance. Most vendors are content with that condition.

How long do you need?

Getting formal approval of the finance takes time and effort from you and the financial institution (and your broker, if you have one). You need to be realistic about the time required in that clause. Traditionally finance clauses in contracts have given purchasers 14 days (from the date of signing the contract) to have their finance approved. In our experience, it now takes more like 21 days for financial institutions to approve finance for purchasers. Every contract has a mechanism for a purchaser to ask the vendor to extend the time for finance approval, however, being realistic from the start is more sensible.

Get your finance approved

Once you have signed a contract, you must undertake your best endeavours to get your financial institution to approve your finance. You need to contact your financial institution or mortgage broker immediately and provide them with everything they require to consider your application for finance for this particular purchase.

If you do not undertake your best endeavours to obtain finance, the vendors may be entitled in law to treat the contract as unconditional, even if finance is declined.

Sometimes a financial institution will provide you with “conditional finance approval”. You need to be aware that your financial institution is entitled to withdraw conditional finance approval. Conditional finance is not enough to proceed with a purchase.

For your purchase to proceed, you must have unconditional financial approval of sufficient funds to complete the purchase (including all fees and stamp duty) before your contract can be considered unconditional.

Get formal finance approval in writing

Your financial institution should provide the approval in writing. If you do not get approval in writing, then you should request this from your financial institution urgently.

When finance is unconditionally approved, provide that written decision to us. We will then write to the vendor and notify them that the contract is “unconditional” in relation to finance. (There may be other conditions such as pest or building inspections.)

Until you have approval in writing, it is unwise to allow a contract to become “unconditional”, because there is a risk that the financial institutional will withdraw finance approval, and you will be left with a contract that you cannot complete. A vendor may be entitled to enforce the contract against you and claim their losses from you.

What if finance is declined?

If finance is declined, then you should get that decision in writing, and provide it to us immediately so that we can terminate the contract on your behalf formally with the vendors. The vendors may require a copy of the written refusal.

This must be done prior to the finance deadline date on the contract (or the extended date, if already arranged). If the contract is not terminated in time, you may be left with a contract that you cannot complete. A vendor may be entitled to enforce the contract against you and claim their losses from you.

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