Understanding pre-approvals and the subject to finance clause.  Author: Courtney Thomas What is pre-approval and what is subject to finance? Why it is wise to use a pre-approval on your home loan or a subject to finance clause? What is a pre-approval? When you have saved your deposit and you are ready to purchase a home, you will need to get pre-approval on your home loan – we can help you with this. Pre-approval means a lender has confirmed how much money they are willing to lend you to purchase a home based on your deposit, income, expenses and personal financial situation. Getting pre-approval is intended to give you a better idea of how much money you can spend so you can easily shop for a suitable home in your price bracket. If you intend to purchase a property at auction, it’s important to secure pre-approval before you attend the auction so you can be reasonably sure you can borrow the required funds. Getting pre-approval will also give you a bidding limit. It is important to note that even with pre-approval, a lender can still decline a loan application if they have concerns about the property you wish to purchase. For example, if they feel it is over-priced or that there’s something wrong with it, they may decline your application for a loan. Benefits of pre-approval:

• Getting pre-approval is free and gives you considerable peace of mind, especially when you’re bidding at an auction
• Your pre-approved home loan is usually valid for up to six months, giving you time to find the right property
• 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 you purchase a property outside of an auction, the bank will always perform an independent valuation of the property. This is to identify its current market value before agreeing to lend you the money to buy it. When you make an offer on a home, you will be required to make the offer in writing. 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 on the lender approving the amount of money you will need to purchase that particular property. If the lender does not approve the amount required, you can withdraw your offer without losing your deposit or being any worse off. 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 if you are able to do so. Unconditional offers An unconditional offer requires the buyer to be certain they want to buy and can complete the transaction on settlement day, regardless of any changes between acceptance of the offer and the day it is officially sold. If you buy at auction and waive your right to a cooling-off period, or change your mind, cancelling the sale can be an expensive exercise. Your contract for sale will outline the consequences of withdrawing from a binding agreement. It is likely to include default penalties and compensation for losses incurred by the seller, along with your own legal or conveyancing fees, building valuation and inspection costs. Talk to your legal advisor about the ramifications of breaking a legally binding contract.   To learn more about how you can be better prepared before you buy a home, call our office to organise a consultation.       General Advice Disclosure: This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, AMP Financial Planning and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.