WHAT IS A FINANCE CLAUSE IN A CONTRACT OF SALE?.
A finance clause is a common provision in real estate contracts that allows the buyer to back out of the deal if they are unable to secure financing within a specified timeframe. It is an important protection for buyers, but it can also be a source of stress and complications if not handled properly. In this blog post, we will discuss everything you need to know about finance clauses in real estate transactions, including common mistakes to avoid and tips for navigating the process with confidence.
HOW DOES A FINANCE CLAUSE WORK?
In Queensland, the Buyer typically stipulates a certain timeframe (usually 14 or 21 days from the date of the contract) to finalise their finance.
If the finance is approved within that timeframe, and all other conditions of the contract have been met, the contract will become 'unconditional' and a settlement date can be determined.
If a Buyer's finance has not yet been approved within 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 this 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 does not have a finance clause, and the Buyer is not 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), as well as other penalties, fees, and costs.
It is important to
• Explain the process of getting finance approval and how a finance clause works in protecting the buyer's interests.
• Offer buyers a checklist of items to consider when including a finance clause in their property purchase contract.
• Provide buyers with information on the different types of finance clauses available, such as unconditional or conditional finance clauses.
• Offer buyers examples of scenarios where a finance clause can be beneficial, such as when the buyer has multiple properties to sell to fund the purchase of the new property.
• Advise buyers to keep the seller informed of any issues or delays in getting finance approval to avoid termination of the contract.
• Provide buyers with information on the consequences of not having a finance clause, such as losing their deposit and being liable for any losses incurred by the seller.
• Suggest that buyers consider obtaining pre-approval for finance before entering into a property purchase contract to avoid any delays or issues with finance approval.
HOW DO YOU REQUEST AN EXTENSION
To request an extension, the buyer will talk to their lawyer, who will communicate with the seller's lawyer. The seller's lawyer will then seek direction from the seller as to whether or not they will allow an extension. Finally, remember that the finance clause extension is not a guaranteed solution. It's important to have a backup plan in case the extension is not granted or falls through. This can include exploring alternative financing options or being prepared to walk away from the deal if necessary. By being proactive and prepared, you can navigate the finance clause process with confidence and avoid common mistakes that can lead to unnecessary stress and complications.
To request a finance clause extension, it is wise to give yourself a day or two to arrange it, as multiple parties are involved in the process.
It's also important to keep in regular contact with the sales agent so they can also communicate with the seller and smooth the way if you require an extension.
Keep regular contact with your real estate agent. By being proactive and communicating your needs to your agent, you can ensure that they are aware of your situation and can take necessary steps to help you secure the extension. It's also important to be aware of the specific requirements of the finance clause and to ensure that you are meeting them in a timely manner.
COOLING OFF PERIOD IN QUEENSLAND
The standard contract for buying a home comes with a cooling-off period of 5 business days. This means if you’re not totally happy, you can cancel the contract during this time.
However, auctions have no cooling-off period.
The cooling-off period also does not apply to a private treaty contract entered into within 2 business days of an unsuccessful auction of that property in which the buyer was a registered bidder at the auction.
COMMON MISTAKES TO AVOID:
-When making an offer to your Seller, avoid 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 or you are pre-approv, 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, but 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 and again, and it is the number one reason buyers request an extension) In this case, you should consider giving yourself 16, 17 or even 21 days for your approval to come through. This takes some of the pressure off on that 14th day and gives you a few days to request an extension if you need one.
If you are seeking to finance the purchase of a property, make sure to do some research on finance clauses and talk with your legal advisor about your options. Planning can make the experience of purchasing a property with finance a smooth and stress-free process.
Be transparent and honest about your situation. If you are having difficulties securing financing or need more time to review the terms of the contract, communicate this clearly with your agent and lawyer. By being transparent, you can build trust and avoid any potential misunderstandings or conflicts with the seller. It's also important to be prepared to negotiate the terms of the extension, such as the length of the extension or any additional conditions that may be required.
CONCLUSION
In conclusion, finance clauses are an important protection for buyers in real estate transactions, but they can also be a source of stress and complications if not handled properly. By planning, communicating clearly with your agent and lawyer, and being transparent and prepared, you can navigate the finance clause process with confidence and avoid common mistakes. Remember, the ultimate goal is to secure the financing you need to close the deal and move into your new home with peace of mind.
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.