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Common Mistakes To Avoid with your Finance Clause
WHAT IS A FINANCE CLAUSE IN A CONTRACT OF SALE?
One of the most common clauses a Buyer will include in a contract of sale is a finance clause, which essentially gives the Buyer time to have their finance approved by their Bank or Lending Institution. This clause protects the Buyer from having to go through with the purchase of a property if they are not approved for finance.
HOW DOES A FINANCE CLAUSE WORK?
The Buyer will stipulate a certain timeframe (usually 14 or 21 days from the date of contract), to finalise their finance, and if the finance is approved in that timeframe (and all the other conditions of the contract have been met) the contract will go ‘unconditional’ and a settlement date can be determined.
If a Buyer’s finance has not yet been approved in the timeframe stated in the contract, or if they have received verbal approval but have not received the appropriate paperwork, they must request an extension from the Seller. If they do not request an extension, or the extension is not approved, the contract will be terminated at which point the Buyer will receive a refund of their deposit, and the Vendor will be free to market their property again and find a new buyer.
If the Buyer doesn’t have a finance clause, and the Buyer isn’t approved for finance, it then becomes a very expensive exercise for the Buyer to attempt to withdraw from the contract. At the very least, the Buyer will usually lose their deposit. The full extent of the consequences will be in the contract, and could include any losses incurred by the Seller (for example, covering any shortfall if the Seller resells the home for a lower price than the original contract), and other penalties, fees and costs.
HOW TO REQUEST AN EXTENSION
It is wise to give yourself a day or two to arrange the extension because multiple parties are involved in the process. Ideally, you would also keep in regular contact with the sales agent so they can communicate with the Seller and smooth the way if you will require an extension.
To request an extension, the Buyer will talk with their lawyer, who will communicate with the Seller’s lawyer, who in turn will seek direction from the Seller as to whether or not they will allow an extension.
In our experience at First National, it is rare for a Seller to not approve an extension, unless the process has been dragging on for weeks with multiple extensions having already been requested.
Approximately 70% of the contracts we receive every year with a 14 day finance clause require an extension. This is avoidable, and by planning ahead you can save yourself, your Seller and your Agent a lot of stress.
Common Mistakes to Avoid:
- Try not to make your offer to your Seller look more appealing by being overly optimistic about how long your approval process will take. If your lending institution has told you it will take 14 – 21 days for approval, don’t put 7 days in your contract;
- Don’t let your, or your Seller’s desired settlement date influence the timeframe you nominate for your finance approval. While it would be nice if everything worked out perfectly according to everyone’s timeframes, you don’t need the extra stress;
- Don’t be pressured by a sales agent to adjust the timeframe of your finance clause. Some agencies try to use these tactics to force a contract to go through as soon as possible;
- Communicate regularly with your Bank or Lending Institution. Most Banks and Lending Institutions are pretty good at giving you plenty of notice either way, however keeping in regular contact can give you an idea of how far along they are;
- Give yourself room to move – if your Bank or Lending Institution has said the finance approval will take 7 - 14 days, this usually means your approval will come through on the afternoon of the 14th day. (We see this time an again and is the number one reason Buyer’s request an extension). In this case, you should consider giving yourself 16, 17 or even 21 days for your approval to come through – which takes some of the pressure off on that 14th day, and gives you a few days to request a extension if you need one.
If you are seeking to finance the purchase of a property, you should definitely ensure you do some research on finance clauses and talk with your legal advisor about your options. It is possible to plan ahead, making the experience of purchasing a property with finance a smooth and stress-free process.
What has your experience been with financing your home? Leave your comments below.
*This article provides general information and opinions only and should not be mistaken for, or relied upon as legal, financial or real estate advice. This article does not take into account your personal objectives or financial situation, and it is strongly recommended you contact a legal professional before making any legal, financial or real estate decisions.
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Common Mistakes To Avoid with your Finance Clause
palmbeachfn.com.au July 2017 First National Palm Beach 15 Palm Beach Ave Palm Beach, Queensland 4221
Phone: 07 5559 9600