If you are considering buying a house or have entered into a contract to buy a house, it is likely that you have included a finance clause to ensure that you can come up with the funds required for the purchase (i.e. getting a finance approval) (if not – please contact one of our property lawyers today on 07 5563 8970 to find out why this is so important!).
The inclusion of a finance clause in a contract is to protect you in the event that you are not able to fund the purchase (either due to an issue with borrowing from a bank, inability to access funds or numerous other reasons). If you do not have a finance clause to rely on should you need to terminate the contract on this basis, or should you be in breach under the contract by being unable to settle (due to finance) then there could be serious legal and financial ramifications for you, including the ability for the seller to retain the full deposit paid (which is often many thousands of dollars), damages, an application for specific performance of the contract, legal costs and interest.
Further, if the seller terminates the contract due to your breach, and later sells it to another buyer for less money than the agreed contract price – then the seller may be able to apply to the court for an order that you pay to the seller the difference between the agreed contract price and the price the seller later sells the property for (this can be upwards of $100,000 depending on the property market and other variables).
People do not generally understand the ins and outs of ‘finance approval’ and sometimes assume that their finance is ‘approved’ when they have only been given a pre-approval by their bank, or have received a letter from their bank telling them that their finance has been approved (without reading the letter in detail to determine whether in fact their finance is actually approved).
Unfortunately, when people incorrectly instruct their solicitor to notify the sellers solicitor that their finance is ‘approved’, this means is that the contract is no longer subject to the finance condition, and the buyer is unable to terminate the contract on the basis of this condition which is a big problem if it turns out that their finance wasn’t actually approved.
Difference between Pre-Approval and Finance Approval
Generally speaking, a ‘pre-approval’ from a bank or lender is an estimate of the approximate amount of money you could likely borrow from them, based on your individual financial circumstances, and helps to provide you with a price bracket in which you can look for your new property, but is not a substitution for a formal approval. Most pre-approvals are likely subject to a whole host of conditions before formal approval can be granted, including verification of your personal circumstances, income, assets & liabilities, the condition of the property you are purchasing, the size of the property you are purchasing and its location. A licenced valuation of the property is also usually required to be undertaken.
Changes in the banks credit criteria and other factors such as having children, buying an off-the-plan property or a unusual type of property (e.g. farm or renovator) could also have an affect on your pre-approval and subsequent formal approval.
Once the bank is satisfied with the pre-approval requirements, they may issue a finance approval letter.
An issue that we have seen occurring, especially in the current economic climate where banks are operating in a competitive mortgage industry, where banks are unable or unwilling to carry out comprehensive due diligence processes in the short timeframes most consumers are demanding (e.g. 14 day finance clauses), and are instead advising customers that their loans are approved subject to conditions (in essence, their loans are not approved at all).
So while the customer is receiving a ‘finance approval’ letter, it becomes apparent that these approvals are only made on the proviso that certain conditions are met. The types of conditions that lenders can include in finance approval letters vary but can include such things as the approval being subject to valuation of the property, or that the approval has been made on the basis of assumptions made by the lender on the information that was provided by the borrower and that the lender reserves the right to withhold/cancel approval if it determines any of its assumptions as being incorrect.
Unfortunately, buyers are not reading these letters in detail resulting in dire consequences.
If the bank has issued a finance approval based on certain conditions, then the funding for the purchase is not automatic. Depending on the conditions associated, the bank may be able to withdraw the approval at any time prior to settlement leaving you high and dry (and facing significant repercussions).
For example, if the finance was approved subject to a valuation being undertaken on the property and the valuation comes back before settlement stating that the house is worth much less than anticipated, the bank can withdraw their offer to finance.
Likewise, if the approval was granted subject to income information that you provided during the loan application process, then if your income changes significantly before the loan is advanced (such as your wage dropped or you lost your job), then the bank could reconsider lending to you. This is something to also keep in mind if you applied for a loan and didn’t find a property until some time later, most pre-approvals/approvals only last for a certain period of time (approximately 3 months).
Changes in the banks credit criteria and other factors could also have an affect on your loan approval status.
When applying for/relying on finance to fund your purchase, it is vitally important that you understand all of your lenders requirements, and ensure that all of the documentation issued by your lender has been completed correctly and in a timely fashion. It is also important for you to routinely follow up your lender to ensure that your loan is being processed, that there are no outstanding requirements and that it is progressing swiftly to accord with the time under the finance condition.
It is also important to remember that the bank relies on the information that you provide, so it is important that the information given, particularly in relation to your financial position, is as accurate as possible. This includes giving them full disclosure about all of your assets and liabilities.
The conveyancing process can be fraught with pitfalls and intricacies that could mean serious ramifications for you if they are not handled by a professional. Our conveyancing team and property lawyers are highly experienced in this area and are able to provide you with the professional guidance needed to ensure that your transaction is a success.
Not only does our team offer competitive pricing and superior service, we are friendly and approachable and can make the entire process as stress free as possible so you can get on with enjoying your new home. Telephone our friendly Gold Coast office on 07 5563 8970 to discuss your property and conveyancing needs today.