Finance Clause Condition

A finance clause, also known as a subject to finance clause or mortgage contingency, is a crucial condition in a real estate purchase agreement. It protects the buyer by allowing them to withdraw from the deal without penalty if they are unable to secure the necessary financing to complete the purchase. In essence, it makes the contract contingent upon the buyer's ability to obtain a mortgage or loan.

The primary purpose of a finance clause is to safeguard the buyer's deposit and protect them from being forced to complete a purchase they cannot afford. Without this clause, if a buyer failed to secure financing after signing the purchase agreement, they could be liable for breach of contract and potentially lose their deposit. This could also expose them to legal action from the seller seeking damages for the failed sale.

Typically, a finance clause will outline specific details, including:

• Loan Amount: The maximum amount the buyer needs to borrow.
• Interest Rate: The maximum acceptable interest rate the buyer is willing to pay. This prevents the buyer from being obligated to accept a loan with an excessively high interest rate.
• Loan Type: The type of loan the buyer intends to secure (e.g., conventional, FHA, VA).
• Lender: Whether the buyer is restricted to using a specific lender or if they have the freedom to choose their own.
• Finance Approval Deadline: A specific date by which the buyer must obtain formal finance approval. This is a critical date, as the buyer typically has until this date to notify the seller if they are unable to secure financing.

If the buyer is unable to secure finance approval that meets the conditions outlined in the clause by the specified deadline, they must notify the seller in writing. This notification usually includes a rejection letter from the lending institution. Upon receiving proper notification, the contract typically becomes null and void, and the buyer is entitled to a full refund of their deposit.

It is essential for both buyers and sellers to understand the implications of a finance clause. Buyers should ensure that the terms of the clause accurately reflect their financing needs and that the deadline for obtaining approval is realistic. Sellers, on the other hand, should understand that accepting a finance clause introduces a period of uncertainty, as the sale is contingent upon the buyer's ability to obtain financing. They may consider asking for a shorter approval period or requiring pre-approval from a lender before accepting an offer with a finance clause.

While a finance clause protects the buyer, it's important to act in good faith. Buyers should diligently pursue financing and promptly inform the seller if they anticipate any difficulties. Failing to do so could be interpreted as a breach of contract, even with a finance clause in place. In conclusion, the finance clause is a vital safeguard in a real estate transaction, providing buyers with protection against financial risk and ensuring that they are not bound to a purchase they cannot afford.