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The most important aspect of buying a property is how you will pay for it. Obtaining sufficient finance approval before you sign a contract, and before a contract becomes "unconditional", is essential.

What do pre-approval and subject to finance approval mean?

Finance is the most important thing to organise when buying a property, especially before making an offer.

Buying a property will require you to take out a mortgage or loan, secured by the title of the property, unless you are lucky enough to be paying cash, or refinancing a property you already own.

We strongly recommend you have written pre-approval in place, from your lender, before you make an offer on a property, including before you bid at an auction. Your broker/banker will advise you if formal pre-approval is necessary, or if they are happy for you to proceed without it, given your personal financial circumstances.

Pre-approval is the lender's confirmation that they are happy to lend money to you, based on certain conditions. It usually lasts for about three months, but it's not a blank cheque - it's always subject to a valuation of the property you propose to buy, and the fulfilment of any lender conditions (such as providing your most recent payslips, proof of building insurance, or a rental appraisal for the property).

When buying a property via private sale / Expressions of Interest, a subject to finance approval special condition can be included in the contract - it's usually built in to the contract already, under the heading Loan, near where the settlement date is written in. This then generally gives you 14 or 21 days (14 is the most common time period) to ensure your lender obtains a valuation of the property and completes their assessment of your personal financial circumstances, so they can issue you unconditional approval (= the next stage after pre-approval; then loan documents are prepared). Most lenders usually require about 14-21 days to complete this process - at the longer end if the property is located in a regional or rural area, due to delays with obtaining a valuation. And if you don't already have pre-approval in place, your lender may require 21 days or even more, to issue both pre-approval and unconditional approval.

Buying a property at auction or under Auction Rules (more info about that here) means you can't include a subject to finance approval condition in the contract. That means you will need to be closely guided by your broker/banker to ensure they are confident, prior to the auction, that there will be no issues later on with the valuation and with obtaining the funds required on settlement day. If there do turn out to be any issues, the bank could reduce the amount they are prepared to lend you. This tends to be more common when buying a property in a new estate, or if you recently change(ed) jobs, or if you buy a financed car after receiving pre-approval.

A reputable mortgage broker / bank mortgage manager can guide you through the process, options and risks, and explain all the financial aspects. We can certainly refer you to fantastic mortgage brokers, who have looked after our clients well - please feel free to let us know if we can assist with that.

Note: the above is general information and should not be considered as legal advice.

Photo by Ketut Subiyanto

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