What is pre-approval and what is subject to finance?
Many first home buyers believe you don’t need pre-approval if you intend to use a subject to finance clause in the sales contract when you find a property to buy.
But that’s not the case!
In this article I explain why it’s a wise move to get pre-approval on your home loan and use a subject to finance clause as well if you can.
What does ‘pre-approval’ mean?
When you’ve saved your deposit and you’re ready to purchase your home, it’s a wise move to talk to us about getting pre-approval on your home loan.
Pre-approval is where a lender confirms how much money they may be prepared to lend to you to purchase a home, based on the deposit you have saved, your income, expenses and your personal financial situation.
Getting pre-approval on your home loan is intended to give you clear guidance on how much money you can spend, so that it makes it easier for you to shop for a suitable home in your price bracket.
It is important to remember that the amount you are pre-approved for is the maximum amount a lender believes that you can currently afford to borrow according to your personal circumstances.
If you intend to purchase a property at auction, it is important to get pre-approval on your home loan before you attend the auction so that you can be reasonably comfortable that you can borrow the required funds.
Getting pre-approval will give you a bidding limit and help you to be reasonably sure that everything will go smoothly with the transaction.
It is important to note that even with pre-approval, a lender can still decline a loan application if they do not like the property you are looking to purchase.
If they feel it is over-priced or something is wrong with the property, they will not approve your final loan application.
However, getting pre-approval significantly reduces the risk of this occurring.
Additionally, some real estate agents and vendors will not take you seriously if you do not get pre-approval on your home loan before you approach them, particularly when you are buying off the plan or are considering building a new home.
Remember, they are frequently approached by time-wasters and ‘tire-kickers’ – getting pre-approval will help them to realize you are a serious buyer.
Getting pre-approval is free and gives you considerable peace of mind, especially when bidding at an auction.
Your pre-approved home loan is usually valid for up to three months.
It helps you set your maximum spending limit – particularly important at an auction.
It shows real estate agents and vendors that you are serious about purchasing a home.
What does ‘subject to finance’ mean?
When purchasing a property outside of an auction, the bank will always perform an independent valuation of the property to find out its current market value before agreeing to lend you the money you need to purchase it.
When you make an offer on a home, you will be required to make the offer in writing and this is called a sales contract.
In this contract, you have the option to include a clause that says your offer is ‘subject to finance’.
This means that your offer is conditional upon the lender approving the amount of finance you will need to purchase that particular property.
If the lender does not approve the amount of financing required, you can withdraw your offer without losing your deposit or being any worse off.
You need to remember that property sellers and real estate agents are naturally out to get the maximum amount of money for a property that they possibly can.
This can often mean that the asking price of a property exceeds its market value and also the amount of money a lender will allow you to borrow for that particular property.
It is important to note that a lender will only allow you to borrow what the valuation says the property is worth – even if you have been pre-approved to borrow more.
That’s why it’s important to get pre-approval and use the subject to finance clause in your sales contract as well if you can!
If the lender’s valuation turns out to be less than the asking price, you can always go back to the vendor and use the valuation to get a better deal.
You may think a property is a good price, but using a subject to finance clause in the sales contract gives you additional peace of mind that you’re not paying too much.
Using the subject to finance clause gives you room to withdraw your offer if the asking price exceeds the lender’s valuation on the property.
It can often help you to negotiate a better price if the lender’s valuation is lower than the asking price.
Things to consider
Sometimes a real estate agent will look less favourably upon your offer if you use the subject to finance clause in the sales contract.
Always remember to mention that your financing is pre-approved to help mitigate any negative view.