Do You Get Your Deposit Back If Finance Falls Through?
Hunting for your first property is an exciting prospect. The process is simple enough: organise your finances, find a property and then make an offer. But have you really got your finances organised? You met a lovely mortgage broker or bank member who told you your borrowing capacity and may even have got your pre-approval in place.
Did you know it's most likely to be a 'conditional' pre-approval and can be revoked if the property doesn't meet certain conditions? But what happens when your valuation comes back and says, "you've paid too much for the property. We are not lending this much for that house?"
Simple put: you might lose your whole 10% deposit! As sad as it sounds, it is not so uncommon for borrowers to think they have everything in place, only to be left short after an auction or private sale.
How can I stop that happening to me?
👉Make your offer 'subject to finance approval.' A subject to finance clause simply tells the vendor that you agree to purchase the property on the condition that you receive formal home loan approval from your bank. Depending on your contract, this should buy you 14 days or so to get your valuation and ensure it fits the 'conditional' nature of your pre-approval. Days refers to calendar days, not business days.
👉Cooling Off Period: 2 business days. Doesn't apply for homes bought at auction.
👉Make your offer 'subject to pest inspection.'
👉Some real estate agents will use tactics such as presenting your offer behind another without this clause. While it's frustrating if you lose out on a great home, wisdom and prudence suggests you should never make an offer without covering your backside.
Real scenario
👉Let me tell you about a young couple that came to me in a panic after this happened to them. Kosta and Arun did most things right; they got a pre-approval and bought within their budget. They paid their deposit on the day. Everything went great! The real estate agent even gave them a bottle of champagne; they celebrated.
👉 Kosta and Arun broke one BIG rule. The real estate agent looked after his own interests and pressured the open viewers about the 'level of competition' for the property. As a result he was presenting the unconditional offers first, that is, offers that did not state "subject to finance" in the clause.
👉The valuation for their property came back from the lender. The bank determined that Kosta and Arun overpaid - even though they stayed within their pre-approved limit. Their loan was declined which forced them to scramble and find another lender. The sale did not go through; Kosta and Arun forfeited their deposit!
What should be included in the 'subject to finance' clause?
Your conveyancer should include:
👉The amount of the loan
👉The name of the lender
👉The date of approval
In most finance contracts, there is an obligation to take reasonable steps to obtain finance. This includes researching information, signing documents and making finance applications. Your offer is then usually made with a 'declaration of application made', but 'decision pending'.
👉You may breach your contract if the lender you make an application of finance with differs from the one in your contract of sale.
👉It's good to use a mortgage broker and conveyancer that know each other; it's not imperative. Mortgage Broker Revesby can introduce a local coveyancer; we'll keep them informed and up to date at every stage to minimise risk of error.
Things to consider
👉Get a pre-approval before you make an offer.
👉Either specify the lender of your pre-approval in your clause, or use a lender that fits the criteria of approved lenders.
👉If your clause is for 8 days, then don't use a lender with 14 day turn-around.
👉Expect delays with your lender valuation. Waiting for the bank to value the property is usually the only excuse for needing a finance clause extension. Some vendors won't agree to an extension if they are spoiled for choice.
👉Don't let the real estate agent pressure you to shorten the finance clause period. Be prudent and hold your ground.
👉 You'll need a mortgage broker to push all these moving parts along. Don't get caught not knowing what to do.
What does a conveyancer do?
👉Will word your contracts in a way that protects your legal rights.
👉They will help keep your deposit safe if your finance falls through.
👉They know the best contracts of sale in your state and what's in your best interests.
Should I sign the Section 66W Certificate?
👉A section 66w certificate is a certificate signed by a solicitor or conveyancer acting for the purchaser which has the effect of waiving the purchaser's 5 business day cooling off period.
👉It can mean all the difference in a HOT market, but your conveyancer will probably not recommend it.
👉You risk losing the 10% deposit PLUS the difference between the contract price and the next selling price of the property should it fetch less.
👉If you don't sign the S66 and you back out of the sale, you simply lose 0.25% deposit plus a penalty fee.
👉The cooling off period starts after the Form 1 statement is served. The length of time taken to receive this form varies. The real estate agent will be quick to serve it, so they don't lose the sale.
👉A letter from the mortgage broker won't be accepted. Your lender must provide the letter explaining the decline in finance.
What if I buy at auction?
👉You can still negotiate a 'subject to finance' clause for a home bought at auction.
👉There is no cooling off period.
👉If your finance falls through, tell the vendor within the specified time frame.
Next steps
👉Do not let this happen to you. Take on the services of a trusted mortgage broker like Mortgage Broker Revesby. We don't charge a fee and we'll help guide you through the whole process.
👉Why would you go it alone?
No fee Service.
Talk to us before making an offer
Matthew Stack
matthew@mortgagebrokerrevesby.com.au
www.mortgagebrokerrevesby.com.au
0423 237 242
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