Pre Approvals and Subject To

Hey finance gurus,
I just had a couple of questions regarding the subject.

1- What are the pros and cons of pre approval? Also do you need to meet certain criteria before the banks will pre approve a loan? (Apart from the obvious lending criteria, my mate mentioned he did not have enough savings for pre approval)??

2 - In the subject to clause on a contract, what do you lose if you do not proceed? For example subject to finance and finance falls through or subject to building and they find terminates. I am aware of the .25 if you pull out during the cooling off period but my understanding is that is when you actually unconditionally purchase the property. If finance fell through would the borrower get this deposit back?
 
Hiya

1. Some people/brokers believe their worthless but I think in some situations they can be very handy. Examples include auction purchases, high LVR loans (when lender has a DUA) and scenarios that are a bit iffy to begin with (mat leave income for instance is one that I just put up).

I'd only ever use lenders that actually assess the preapproval - which usually results in the only condition being the valuation stacking up.

2. Depends on the state and the wording of the contract.

Cheers

Jamie
 
Im no guru, my take is

Hey finance gurus,
I just had a couple of questions regarding the subject.

1- What are the pros and cons of pre approval? Also do you need to meet certain criteria before the banks will pre approve a loan? (Apart from the obvious lending criteria, my mate mentioned he did not have enough savings for pre approval)??

we dont do pre approvals unless the deal looks tight, we suspect there is a credit file issue ( in which case we ask client ot pull file), client is buying unconditionally ( cash contract, 66w, auction etc) Pre apps can hurt your credit file if the deal is marginal to start with, AND they arent used witn 7 to 14 days


2 - In the subject to clause on a contract, what do you lose if you do not proceed? For example subject to finance and finance falls through or subject to building and they find terminates. I am aware of the .25 if you pull out during the cooling off period but my understanding is that is when you actually unconditionally purchase the property. If finance fell through would the borrower get this deposit back?

depends on the terms of the contract, usually the min is the deposit paid, and often to 10% PLUS resale costs and any difference if sold to another at lower value

ta
rolf
 
In the subject to clause on a contract, what do you lose if you do not proceed? For example subject to finance and finance falls through or subject to building and they find terminates. I am aware of the .25 if you pull out during the cooling off period but my understanding is that is when you actually unconditionally purchase the property. If finance fell through would the borrower get this deposit back?
If "subject to" clauses are included, and you legitimately terminate for those reasons (i.e. not failing to apply for finance, or only applying somewhere that you know you'll be refused), then you don't lose anything.

If you're unconditional, and you terminate within cooling off, you lose the 0.25% (or whatever it is in your state, if your state has cooling off).

If you're unconditional, and you terminate outside cooling off, you will almost certainly lose your deposit, and if your deposit is not enough to cover the vendor's damages resulting from your breach, they can also sue you for more, e.g. difference between what you were willing to pay and what they could sell it for to a subsequent purchaser.
 
Pre approvals are only recommend when applications are borderline.

Randomly submitting a pre approvals only incurs a hit on your credit file which becomes an issue for aggressive investors.
 
Thanks for clarifying!
Just on point 2 so long as the contract is written correctly, such as "subject to finance" "If finance cannot be obtained the borrower must be returned all money paid"?
If written something like this and finance falls through then the buyer would recieve all deposit and the vendor gets nothing and has to go back on the market?
 
Thanks for clarifying!
Just on point 2 so long as the contract is written correctly, such as "subject to finance" "If finance cannot be obtained the borrower must be returned all money paid"?
If written something like this and finance falls through then the buyer would recieve all deposit and the vendor gets nothing and has to go back on the market?

Depends on the state. In NSW generally a finance clause would not be accepted by the vendor. Finance is expected to be sorted within the cooling off period, and if necessary the cooling-off period can be extended. If the finance fails then the 0.25% deposit is lost.

Other states are different: there may not be a mandatory cooling-off period so clauses are used to cover the buyer.

But, as has been mentioned, bad-faith attempts at getting finance approval will not suffice, and cases have occurred where the vendors sued for the full deposit plus damages when the buyers changed their mind and faked finance failure.
 
If you were not to get pre approval and made a successful bid at auction then what happens if you are unable to get finance?

For example let us say the broker was not thorough and there was a credit problem? I understand this is where the purchaser would likely lose their deposit, what happens in the event only a small deposit was paid? Am I correct in thinking the vendor can sue the purchaser for the remaining deposit plus costs of advertising, auction.etc?

Finally in this event can the purchaser then file a case against the broker for not performing Due diligence?
 
? Am I correct in thinking the vendor can sue the purchaser for the remaining deposit plus costs of advertising, auction.etc?

Finally in this event can the purchaser then file a case against the broker for not performing Due diligence?

yes to number one

maybe to number 2 depending on the circumstances.

ta
rolf
 
Hey Rolf,
Do you have a quick example of a circumstance?

one to me would be a broker issuing a conditional approval in their own name without backing from a lender

There are LOTS of outcomes where there are various levels of responseabilty incl the borrower

ta
rolf
 
Back
Top