You’ll typically find that the average person requires finance from a bank or lender to purchase property.

If finance is not approved at the time the contract is signed or the purchaser is not a cash buyer, a finance condition, stating that the contract is ‘conditional’ on, or ‘subject to’ the purchaser being lent a specific minimum loan amount, is included in the contract as a measure to safeguard the purchaser.

By having a contract of sale drawn up with a ‘Subject to Finance’ clause included, it enables the purchaser to withdraw from the contract if they are unable to obtain the necessary finance to purchase the property.

How to tell if finance has been approved

“Has finance been approved yet?” – This is the question key parties (the purchaser, the vendor, the real estate agent, and the conveyancers) want answered when a contract for sale includes the condition of ‘Subject to Finance’.

For this to happen, the purchaser needs to obtain finance approval in writing, on terms and conditions acceptable to the purchaser (this could include ‘conditional’ or ‘unconditional’ approval, depending on the agent’s contract template used).

Unconditional approval is usually granted once the banks have met their standard for supporting documents (Payslips, ID etc) and have conducted a valuation of the property / acceptable security and are satisfied with that against the lending amount.

Once finance has been approved by the lending institution or bank, notification will be given in writing to the purchaser, conveyancer and agent they are purchasing the property through. Once this happens, finance has “officially” been approved and the contract becomes unconditional – meaning that the purchaser can no longer rely upon the finance condition and must proceed with the purchase (subject to any other conditions being included).

Can finance be unconditional, but still have conditions?

One point we’d like to draw your attention to, that most purchasers and even quite a number of real estate professionals are unaware of, is the fact that when they receive a finance approval notification in writing, and upon notification of the approval to the vendor, the ‘Subject to Finance’ condition is deemed satisfied and it doesn’t matter whether there are conditions included in the approval or not.

Once approval has been received in writing, the purchaser will be bound by the contract and obligated to fulfil the requirements therein (subject only to any other Special Conditions), notwithstanding that the lender may subsequently withdraw the approval.

South Australian real estate agents, should also note that it also depends on which contract template is being used for the contract, as to the standard conditions included in the template contract.

The REISA (Real Estate Institute of South Australia) contract states that it doesn’t matter whether it’s conditional or unconditional approval, even if a written approval includes numerous conditions, it is deemed to satisfy the condition of the contract and once received makes the contract unconditional (if there are no other conditions).

The Society of Auctioneers and Appraisers contract isn’t as specific as the REISA contract and simply mentions that approval received in writing satisfies the condition, it doesn’t specify whether it is to be unconditional or whether conditional approval also satisfies the condition, so it comes down to what conditions the Purchaser is willing to accept in the approval. I believe that conditional written approval provided by the purchaser or their bank or loan broker would be taken as satisfying the finance condition.

When ‘Subject to Finance’ can’t be used

Some purchasers incorrectly presume that by including a ‘Subject to Finance’ clause, if they are then unable to obtain finance for the property purchase, that the contract is simply cancelled and that they will have the deposit they paid refunded to them.

‘Subject to Finance’ clauses typically contain a special condition stating that the purchaser will use their best endeavours to apply for and do everything necessary to obtain the loan. In the event that the purchaser fails to meet this requirement, for example by not even trying obtain the loan, the vendor may then choose to take legal action against the purchaser. Trying to use the ‘Subject to Finance’ clause to get out of an unwanted purchase is not what this clause is intended to be used for.

If a purchaser becomes aware that finance is unlikely to be approved in the timeframe specified in the ‘Subject to Finance’ clause, it may be possible for them to try and see if the vendor and/or their agent will agree in writing to an extension or variation of the finance clause.

Of course, everything discussed above only applies to sale by private treaty. When buying a property via auction, purchasers are buying the property on an unconditional basis and need to make sure they have their finance in place prior to bidding.