what is a subject to finance clause

What Is a Subject to Finance Clause? A Seller's and Buyer's Guide

easySale

easySale

— 11 min read
What Is a Subject to Finance Clause? A Seller's and Buyer's Guide

A subject to finance clause is a condition in a property contract. It says the sale only goes ahead if the buyer gets the home loan they need by an agreed date. If the lender says no in time, the buyer can usually walk away without being penalised. If the buyer meets the condition, the sale becomes firm and moves to settlement.

That protects the buyer. For the seller, it means a signed contract that is not yet certain. This guide explains both sides in plain language, so you know what the clause does, where it can go wrong, and what to do if you are the one waiting on a lender’s decision.

EasysaleWant More Certainty When Selling?Easysale buys New Zealand homes in any condition, offering a straightforward alternative for sellers seeking a fast, fair cash offer.Visit Easysale

TL;DR

  • A subject to finance clause makes a sale conditional on the buyer’s loan being approved by a set date.
  • If finance is declined in time and the buyer follows the contract’s steps, they can generally cancel and get their deposit back.
  • Pre-approval from a bank is helpful, but it is not the same as final approval for a particular property.
  • For sellers, the clause adds risk and delay. A sale with no finance condition removes that risk.
  • Always read the exact wording in your own agreement and ask your lawyer before you sign.

Table of Contents

What a subject to finance clause means

Most people buy a home with a mortgage. Before the lender releases the money, it checks the buyer’s income, debts and spending, and it has the property valued. That process takes time, and a buyer cannot be sure of the result until it is finished.

The clause covers that gap. The buyer signs the contract, but the contract says the purchase depends on the buyer getting finance on acceptable terms. In New Zealand this usually appears as a finance condition in the agreement for sale and purchase. Our guide to the sale and purchase agreement in NZ shows where conditions like this sit in the document.

In practice, the clause answers three questions:

  1. How much does the buyer need to borrow?
  2. From whom, if a lender is named?
  3. By when must the buyer confirm the loan is approved?

If the answers are not filled in clearly, the clause can cause disputes later. A vague phrase like “subject to satisfactory finance” leaves room for argument about what “satisfactory” means and who decides.

How the clause works step by step

The details differ between contracts, so treat this as the general pattern and check your own document.

  1. The offer is made with the condition written in. The buyer includes the loan amount, and often the lender, and a date for the condition to be satisfied.
  2. The buyer applies for the loan. This is not optional. A buyer who sits on their hands and then cancels because “finance was not approved” may be in breach of the contract.
  3. The lender assesses the application. This usually includes a valuation of the property and a check of the buyer’s finances.
  4. The buyer tells the seller the outcome. Most agreements require notice in writing, through the lawyers or the agent, by the condition date.
  5. The sale becomes unconditional or ends. If finance is approved, the condition is satisfied and the sale is firm. If it is declined, the buyer can usually cancel under the clause.

The condition date matters more than most people realise. Miss it, or give notice the wrong way, and the rights in the clause can be lost or the contract can be put in doubt. That is why lawyers on both sides watch the date closely.

What a good finance condition should say

A clear clause saves everyone trouble. Look for these points before you sign:

  • The loan amount. State the figure, not just “a mortgage”.
  • The lender, or a clear statement that any lender will do. Naming a lender narrows the buyer’s options but makes the condition easier to test.
  • The date. A realistic date is better than a hopeful one. A very short window can be too tight for a lender to complete a valuation and formal approval, which sets the buyer up to ask for an extension.
  • What “approved” means. Does a conditional approval count, or must it be unconditional?
  • How notice is given. Who sends it, to whom, and in what form.
  • What happens to the deposit. If the condition fails, the deposit should be returned, not held up.

Buyers should also understand the phrase “on terms satisfactory to the buyer”. It can give the buyer room to judge whether the loan suits them, but a buyer who does not act honestly, for example by refusing a good offer from a lender simply because they have changed their mind, risks being in breach.

What the buyer has to do

The clause is not a free exit. A buyer who relies on it is generally expected to:

  • apply for the loan promptly and with accurate information;
  • supply the lender with what it asks for, such as payslips and bank statements;
  • accept reasonable finance if it is offered on the terms the contract describes;
  • tell the seller the result by the due date, and in the form the contract asks for.

A buyer who does none of this has not really tested the finance. If the seller suspects that, they may argue the condition was never properly relied on. Sellers should pass any such concern to their lawyer straight away.

If finance is delayed or declined

Things do not always run to plan. Here is what to do in each case.

If the lender needs more time. Valuations, extra documents or a busy lender can push approval past the condition date. The buyer should ask for an extension in writing before the date passes, usually through their lawyer. The seller does not have to agree, but many do when the buyer is clearly close to approval and the alternative is starting again.

If the loan is declined. The buyer should tell the seller or their lawyer in writing as soon as possible, within the contract’s timeframe, and keep the lender’s decision as evidence. If they do this properly, the contract generally ends and the deposit goes back to them.

If the buyer does nothing. Silence can leave the contract alive. If the date passes and no valid notice has been given, the deal may become unconditional or the seller may gain the right to cancel, depending on how the clause is written. A buyer who then cannot find the money for settlement can lose their deposit and may be held responsible for the seller’s losses.

Three finance condition scenarios and outcomes

If you are a seller, a failed finance condition is frustrating but not the end. You can usually put the property back on the market straight away. If your timing is tight, see the options below.

Does pre-approval replace the clause?

Usually not. Pre-approval, sometimes called conditional approval, tells a buyer roughly what a lender is prepared to lend. It is subject to conditions, and the lender can still change its mind when it looks at the actual property, a valuation, or a change in the buyer’s circumstances.

For that reason many buyers keep a finance condition even when they hold pre-approval. Others, particularly at auctions or in competitive bidding, choose to waive it and accept the risk. A mortgage adviser can help a buyer judge how safe that is. If you need advice on lending before making an offer, speak with a licensed mortgage adviser, not just a friend with an opinion.

Finance condition, other conditions and unconditional sales

A finance condition is one of several that can appear in a contract. Others commonly cover a builder’s report, a LIM report, the buyer’s lawyer approving the title, or the sale of another property. Each one is a separate door the buyer can use to leave if it is not satisfied.

An unconditional agreement has none of these. Once signed, the buyer is committed, and the only question is settlement. That certainty is why many sellers value it. Our article on what an unconditional offer is covers the basics, and why unconditional sales suit some sellers looks at the trade-offs. If you are weighing up when money changes hands, read what to check about deposit timing before signing.

It is also worth keeping the clause separate from other terms. A finance condition is not the same as a cooling-off period, which is a legal right that applies in some jurisdictions regardless of what the contract says, and it is not the same as a property being “subject to a mortgage”, which simply means there is an existing loan secured against it. For sellers, our overview of real estate agreements and their terms is a helpful companion.

Finance condition, other conditions and unconditional sales

What it means if you are the seller

A subject to finance offer can look attractive on paper, especially if the price is right. But before you accept, think through the practical risk:

  • Your property may be off the market for weeks. If the buyer’s finance fails, you have lost that time.
  • Your own plans may depend on this sale. If you need the proceeds to buy another home, pay out a relationship property settlement, or cover a mortgage, a conditional sale is a gamble.
  • Buyers can ask for extensions. You will need to decide whether to agree or hold the line.
  • You can negotiate. A shorter condition period, a named lender, or evidence of pre-approval can all reduce the risk.

Talk to your lawyer before agreeing to any finance condition, especially if you are relying on the sale proceeds for something time-sensitive.

Our view: when a conditional sale does not suit the seller

We speak with homeowners every week who are not choosing between a good offer and a bad offer. They are choosing between certainty and hope. A person selling after a separation, an owner clearing an estate, or a landlord holding a tenant-damaged property usually cannot afford a month of waiting only to find the buyer’s bank said no.

What we see most often is that the price is not what hurts these sellers. The delay does. Mortgage payments, rates, insurance and the stress of a house sitting on the market all keep running while a finance condition ticks along. Some sellers also find that repairs, consents or tenants make lenders cautious about the property, so the buyer’s finance is more likely to be questioned.

That is why we buy for cash, with no finance condition. When we make an offer, it does not depend on a bank’s decision, so the sale does not depend on one either. You choose the settlement timing, and you can sell without repairs, without an agent and without commission. It is not the right path for everyone, and if you have time, a conventional sale may fetch a different result, so compare your options and get independent legal advice either way.

— Aaron

When you need certainty, not a condition

If a finance condition is putting your plans at risk, we can give you another route. We buy houses in New Zealand in any condition, including damaged, unconsented, tenanted and inherited homes, and our offers are not subject to finance. You submit your property details, receive a no-obligation offer, and settle on the timeline that suits you.

Easysale

If speed is the priority, see how we can sell your house fast. If you would rather keep things quiet, our private sale option explains how it works. Sellers dealing with a separation can read about selling during a divorce or separation, and families handling a deceased estate can start with our estate sale page. Our main site, EasySale, has the full list of situations we help with.

A worked example

Imagine a buyer signs to buy a house for an agreed price, with a finance condition that runs for a set number of days. They have bank pre-approval, so they feel confident.

The bank then values the property and comes in lower than the purchase price, and the lender reduces the amount it will lend. The buyer cannot cover the gap. They tell the seller in writing before the condition date, include the lender’s letter, and the contract ends. Their deposit comes back.

Now picture the same buyer, but they miss the date and say nothing. The seller’s lawyer writes to ask whether the condition is satisfied. Depending on the wording, the seller may be able to cancel, or the buyer may be treated as having accepted the risk. The difference between those two outcomes is a single piece of paper sent on time.

This is why notice and dates are the heart of the clause. It is also why we encourage everyone, on either side, to have a lawyer read the agreement before it is signed, not after a problem appears.

Common mistakes to avoid

  • Treating pre-approval as a guarantee. It is a good sign, not a promise.
  • Leaving the details blank. A missing loan amount or date makes the clause hard to apply.
  • Choosing a date that is too tight. Lenders need time, and a buyer asking for an extension later puts the seller in a difficult spot.
  • Not telling the seller the result. The contract usually requires notice, so give it.
  • Accepting a conditional offer without a backup plan. If you are the seller, decide in advance what you will do if the condition fails.
  • Signing without legal advice. A short conversation with a lawyer before signing costs far less than a dispute afterwards.

FAQ

Can a buyer get out of a subject to finance contract?

Yes, if the lender declines the loan and the buyer gives proper notice by the due date, they can generally cancel and recover their deposit. The buyer must have applied for finance honestly and followed the contract’s steps. A buyer who simply changes their mind is not protected.

Do I still need the clause if I have pre-approval?

Usually yes, if you want protection. Pre-approval is not final approval, and a lender can still decline once it values the property or reviews your circumstances again. Buyers who waive the condition do so knowing they could lose their deposit if the loan fails.

How long should a finance condition last?

It depends on the lender, the property and the buyer’s paperwork. The period should be long enough for a valuation and formal approval, so a very short window can be risky. Your lawyer or mortgage adviser can tell you what is realistic for your situation.

What happens to the deposit if finance is declined?

If the buyer follows the contract and gives notice in time, the deposit is normally returned. If they fail to give notice, or never applied for finance, they may risk losing it. The exact outcome depends on the wording of the agreement.

Can a seller avoid finance conditions altogether?

Yes. A seller can ask for an unconditional offer, or sell to a cash buyer whose offer does not rely on a lender. This removes the finance risk but may involve a different price or process, so compare your options with your lawyer.

Sources

This guide draws on general contract practice and on our own resources for New Zealand sellers:

Read more