What is loan approval?
It is a common scenario when purchasing a property, a purchaser will make the contract of sale subject to them obtaining loan approval to complete the purchase, also known as ‘subject to finance’.
General condition 20 (previously general condition 14) sets out a purchaser’s obligations regarding loan approval, and strict compliance is crucial.
This condition is for the benefit of the purchaser, not the vendor. A vendor cannot terminate the contract if the purchaser’s loan is not approved.
It should also be noted that sometimes this general condition can be varied by a special condition so this needs to be considered when reviewing the contract of sale.
What is strict compliance?
Always discuss your contractual obligations with your lawyer regardless of whether a contract of sale is subject to loan approval.
Generally speaking, strict compliance is:
- the purchaser immediately applies for the loan as set out in the particulars of sale
- does everything reasonably required to obtain loan approval
Say, for example, a contract of sale is subject to approval of a loan with a lender for a loan amount of $500,000 by a specified date.
The purchaser must apply for a loan with the specified lender (or another lender chosen by the purchaser) for the specified dollar amount, not an amount more. So don’t go applying for a loan of $520,000 if the specified loan amount is $500,000.
What if my loan is not approved?
If the loan has not yet been approved then it is common practice for a purchaser to seek an extension of the loan approval date, the purchaser should discuss this with their lawyer.
If the loan is not approved then the purchaser may give written notice to the vendor ending the contract of sale along with evidence of rejection or non-approval of the loan. Such notice is provided within 2 clear business days after the approval date or any later date allowed by the vendor.
It is also a requirement that when providing such written notice, the purchaser is not in default under any other terms of the contract of sale, for example, failure to pay the deposit when due.
What if my loan is conditionally approved?
It is not a requirement that the loan be unconditionally approved, conditional approval will still satisfy the requirement that the loan be ‘approved’.
Please note, the above contains very general information on the subject matter and should not be regarded as legal advice. Legal advice should always be sought as to your specific circumstances.
