Loan Pre-Approved - ?Finance Clause Needed

Hi,

If you have a loan pre-approved, when you make an offer on a property (that is for private sale, not auction), do you really need a 'subject to finance clause'?

Assuming your job/income hasn't changes since you got the pre-approval, you have a pretty good idea of the value of the property in question from recent comparable sales, and your offer amount is such that the pre-approved loan amount will be enough to make the purchase - can you safely omit a subject to finance clause?

I find this clause can weaken your offer/negotiating position with the vendor when you are trying to get a property at a discount - and real estate agents seem to cringe every time they hear it's coming.

Any thoughts from brokers or investors?

Anyone had the experience of not getting finance unconditionally approved despite having pre-approval in place???

GSJ

Preapprovals aren't worth too much. Often the lender is just approving it on the figures without doing employment or CRA checks. Any broker could give you the same info over the phone - I reckon a lenders preapproval is a marketing tool.

if you were my client I would be pushing for a finance clause for your protection unless you were squeaky clean - and even then I would rather a get out of jail free clause ...

Yes, you need a subject to finance clause IMHO.

I had to pay for the lender's valuer to go and look at a block of land I wished to purchase even though I had a pre-approved loan to buy and build and I was happy to pay.


Sheryn

The valuer may not agree with your valuation of the property, even if you have the serviceability. If it's an environment when the bank suddenly becomes more conservative.... my understanding is that when the banks want to rein in lending they just make the valuation more conservative.

hi GSJ
yes you do and need the subject to finance and would not suggest anyone remove it.
two reasons.
1. an approval is not an approval until settlement, lots of things can happen between exchange and settlement as they say its a long time in politics well its longer in real estate and its there to protect you.
2. which is even more important is it gives you a time bracket to delay if you have other problems down the track.
you never gain any thing to remove it so why do it.
I have not seen a legal person that has said thats ok remove something that protects you without any gain and it doesn't increase your offer by removing the clause, if anything it strengths it because you can leave it in and show the vendor you pre approval ( remember they want to sell it, so they will look at the pre approval before this clause).
one little problem with this clause ( and I would not try to pin my hat on this clause )is if the vendor finds you finance at a rate you don't like and then the clause is out the window anyway.
my .002

Always negotiate!!!

Hi GSJ

Whose interests are your responsible for?

Yours.

Whose back are you covering?

Yours.

Should you always include a ‘subject to’ finance clause or building inspection clause or any other relevant clause? Well, it’s up to you but a pre-approval is not an approval, so why would you not protect your interests?

If you think you have a ‘pre-approval’ which you can rely on, still make the sale ‘subject to valuation’. Remember that ‘valuation’ covers quite a bit of ground, a valuation is not just about price.

Are you buying for investment, does the deal turn on a certain level of rent return? The rental estimate by the Valuer is what the lender will take, not your estimate. What happens if the Valuer says the estimated rental is $150 per week and your deal just scrapes in at $200 per week? How are you going to make up the difference in serviceability?

Are you buying to renovate? What happens if the Valuer recommends to the lender that the property is not in very good condition, and therefore that the lender ‘proceed with caution’? After much discussion in the Securities Department, they decide to offer you a lower LVR to cover the increased risk. Will the deal still run if you have to come up with another 10% in funds or equity from another property?

What happens if the Valuer does not agree with your estimate of market value, and the most recent three comparable sales in the immediate neighbourhood were from 15 months ago. This happened to me, and the difference in value was more than $60,000. The Valuer was quite happy to review the valuation, if we could provide comparable sales. We couldn’t as there weren’t any. Nothing wrong with the property except that it is in a tightly held area with very few sales as nobody sells!

What happens if there is a tightening of credit, and everything comes back OK with the valuation, but that the lender decides to downgrade lending policies (happened recently with a niche product) or interest rates rise and you no longer service the debt? One quarter of one percent interest rate rise can pack a decent wallop particularly if you are at the edge of your serviceability.

So why take the risk? At the minimum, ‘subject to valuation’ will provide some time for your ‘pre-approval’ to be validated.

As Simon commented, pre-approvals aren’t worth much. I try and dissuade my customers from applying for pre-approvals. They can actually be quite dangerous as they are still reliant on so many external factors, and also on the customer’s behaviour, too. I had one young customer last year, after we had lodged the application for finance he was suddenly informed he had an $800 telco default on his CRAA – which, quite literally, was not there the week before when he applied for his free Baycorp credit file report. In the week in between a discontinued phone contract from 2002 had finally worked it’s way through the system and landed on his file. To say he was shocked is an understatement.

So remember the fable of the curse on the vintner and take heed: There’s many a slip twixt the cup and the lip.

Rely on nothing and on no one when you are buying something as significant as a property. Make sure you protect your self every step of the way. Hasten slowly and read everything before you sign it.

In my experience, the most common form of trauma for buyers is signing a contract which they have not read, and finding that they have promised a 10% deposit by next Tuesday, when they have $250 in the bank and will be relying on the FHOG or refinancing an existing property for Funds to Complete.

And regarding impressing the Agents or negotiating a ‘better deal’ with the vendor. Some of the strongest deals I have made or been party to or assisted with finance application have been those with the most advantageous price, terms and conditions for the buyer. Customers I am assisting now have negotiated $25,000 less than the advertised price, on $1,000 deposit, with a five months settlement. Subject to finance. Subject to valuation. Subject to a Deposit Bond. Subject to building and pest inspection.

The house is immaculate, in absolutely pristine condition, just beautiful, and a bargain! Not bad for an afternoons work!

Keep negotiating!

Cheers

Kristine

Finance and Auctions???

Hi,

Thanks for all the replies so far.

Kristine, that's a very informative post as always - can't give kudos twice in a row though!

I agree that as a minimum you may put a 'subject to bank valuation' clause if you are confident with your serviceability. And as you mention, if part of this serviceability is reliant on rental income (ie, it's not a PPOR but an investment property) then the bank valuation of the property and the rent, becomes more important.

I guess that even if you have very recent and directly comparable sales (eg. 3-6 months) and your offer is below those comparable sales - you still can't for certain predict the bank valuation (or assume it will be at the sale price), or the banks general lending policies at the time.

I certainly appreciate that the finance clause is there to protect you, and would put it in all offers - and did so recently, but still feel there may be particular situations or circumstances where it may weaken your position, and where the buyer is financially in a stable and strong enough position to not make it essential, and/or the buyer has sufficient skill/expertise to value the property (at market value or more conservatively) in question.

Now also...what about all those properties going for Auction - clearly they are unconditional contracts - so are all those people bidding on properties at auction getting pre-approval and a bank valuation too, prior to even bidding at an auction?

I would find that hard to believe...?

Do people on the forum here bidding (without the certainty of buying) at auction, always get a bank valuation prior to bidding on an interested property?

If you believe you always need a finance clause, then shouldn't you always do a bank valuation prior to bidding at an auction? - in effect getting unconditional finance approval prior to making a bid?

Also, if you were the vendor, all other things being equal, wouldn't you prefer an unconditional offer versus one with a finance clause - where your property goes 'under offer/contract' for 5-10 days or longer, and then may not be sold after that time as finance did not get approved, for whatever reason?
Any thoughts?

GSJ

Hi GSJ,

I absolutely agree that if it is possible to have a finance clause I'd like to have one. But the reality is that it's just not possible sometimes. It might be an auction, or the vendor might just say no.

I'm reminded of a favourite saying "Bite off more than you can chew and chew like hell", when I think of the work I've done for some clients who have bought without pre-approvals and a 30 day settlement . But of course, we got there in the end because we had to.

Good luck with it.

Cheers, Medine

GSJ said:

... Now also...what about all those properties going for Auction - clearly they are unconditional contracts - so are all those people bidding on properties at auction getting pre-approval and a bank valuation too, prior to even bidding at an auction?

I would find that hard to believe...?

Do people on the forum here bidding (without the certainty of buying) at auction, always get a bank valuation prior to bidding on an interested property?

If you believe you always need a finance clause, then shouldn't you always do a bank valuation prior to bidding at an auction? - in effect getting unconditional finance approval prior to making a bid?

Also, if you were the vendor, all other things being equal, wouldn't you prefer an unconditional offer versus one with a finance clause - where your property goes 'under offer/contract' for 5-10 days or longer, and then may not be sold after that time as finance did not get approved, for whatever reason?
Any thoughts?

GSJ

Click to expand...

Hi GSJ

Auction is a very definite 'buyer beware' situation and in many areas of Melbourne sale by public auction is the normal way of selling.

When I was doing the Estate Agent's Licensing course there were many Agents genuinely puzzled at the mention of 'Finance Clauses' and the like.

They worked to the west of Union Road and had never had a sale 'subject to' anything!

My most recent acquisition was an unconditional 30 day sale, and some years ago I bought at auction on a whim, with nothing organised at all! Both sales settled on time with nothing untoward happening.

But ... what I do myself is not necessarily what I would countenance from a professional perspective! That is not to say that I think my customers are any more or less brave, foolhardy, smart, stupid, clever or experienced than I am, just that I have an inbuilt caution when it comes to looking after other people. I guess I know my own situation quite well, and that also includes my tolerance to risk. If push comes to shove, I would happily sign on the dotted for a good deal and find the finance for it later. There's oceans of money out there but I have lived through the 'Recession We Had To Have' and my first Better Business Loan was in 1989 at 24.25%.

Perhaps it's a good thing I didn't know any better as it was that deal which quite literally set me up!

But try telling a customer 'Oh, well, Mr GSJ, because of (fill in the blanks) the deal is a bit short one end and the only lender willing to take the deal is going to charge you $$$ setting up costs and %%% interest.

So, no, you can't always walk across a raging river and keep your powder dry, but there's usually no need to throw it in and jump in after it, either!

All things in moderation and I would consider it to be over-kill to get valuations for every property you were thinking of bidding for. But then again, would you go and bid to the absolute limit of your capacity? (Says she who has done that!)

Hmmm. What it comes down to is knowing yourself, what you are capable of and where your priorities lie. Mine lie with the deal, and I will figure out a way to make it happen. Other people quibble about a 0.10% difference in the interest rate and often leave the restaurant having examined the menu from all angles but without ordering at all!

Perhaps instead of asking what are other people's modus operandi you could be working out what yours is? Buying property is no different to anything else in life, it is very individual and quite personal, and subject to change without notice.

It is also the greatest game on earth, has no age limitations and recognises no class, gender, income or education. Buy property, make money is very simple and as Dale once commented, property is very forgiving.

So from a professional perspective I would caution you to dot every 'i' and cross every 't', but if you were my 'mate' I'd say 'just do it!'.

You'll never know if you don't have a go!

Cheers

Kristine

A year an a half ago, a client of mine asked me to get a pre-approval, which we did with a minimum of fuss. We provided all of the appropriate income and other supporting documents to the bank.

Shortly afterwards the client found a house and I submitted the appropriate documents to the lender. The lender then wanted additional tax returns from the client. The deal got through in the end, but the pre-approval was worthless.

Many people also tell me that the bank has pre-approved them for $300,000. I ask if they've signed a loan application and provided payslips etc. They always tell me, "No, the bank manager just put it into the computer".

This is not an approval for a home loan. This is simply an indication that the applicant might be able to borrow $300,000 if all of their paperwork corresponds to what they said.

In my experience, 50% of clients quote an income figure that is inaccurate, either because they don't know if their package includes super, they neglect to mention salary sacrifice or their income varies from one week to the next. The only way this can be properly verified is by properly checking the appropriate paperwork.

Thanks all mortgage brokers for your replies.

Some good points have been made.

Again, my view is that while finance clauses are important and protective (and from a professional point of view, I can certainly understand why brokers would err on the side of caution), how essential they are in the context of each property deal is dependent on several other factors/circumstances particular to the individual investor, their financial situation and the property in question.

So...for all practical purposes, I feel that there can be times where having this clause is not essential - as long as the risks of doing so are well understood and mitigated.

Thanks,

GSJ