Contract Pending Finance

A contract pending finance, also known as a “subject to finance” clause, is a common stipulation in real estate agreements that protects the buyer. It essentially gives the buyer a specified period to secure financing (typically a mortgage) for the purchase of the property. If the buyer is unable to obtain satisfactory financing within the agreed-upon timeframe, they can terminate the contract without penalty.

This clause is crucial because most buyers don’t have the cash on hand to purchase a property outright. They need to borrow money from a lender, and securing that loan is a multi-step process involving application, appraisal, credit checks, and underwriting. The finance clause allows the buyer to pursue this financing without being irrevocably bound to the purchase if they are ultimately unsuccessful.

Several key elements are typically included within a finance clause:

• Finance Amount: The specific amount of money the buyer needs to borrow.
• Finance Period: The duration the buyer has to secure financing (e.g., 14 days, 21 days). This timeline is critical and should be carefully considered.
• Interest Rate: Sometimes, a maximum acceptable interest rate is specified. This protects the buyer from being forced to accept a loan with unfavorable terms.
• Lender: The clause may specify the type of lender the buyer intends to use (e.g., a bank, a mortgage broker).
• Notification: How and when the buyer must notify the seller if they are unable to obtain financing.

The process generally works as follows: The buyer and seller agree on the terms of the sale, including the ‘subject to finance’ clause. The buyer then diligently applies for a mortgage and works to secure approval. If, within the finance period, the buyer is declined for a loan, or if the loan terms are unacceptable (e.g., interest rate is too high), the buyer must formally notify the seller, usually in writing, that they are unable to obtain financing. This notification must be within the specified finance period. Upon proper notification, the contract is typically terminated, and the buyer’s deposit is refunded.

It’s important to note that the buyer has a duty to act reasonably and in good faith in attempting to secure financing. They can’t simply change their mind and use the finance clause as an excuse to back out of the deal. They must actively pursue loan applications. Lenders will typically provide a written denial if a loan is rejected.

For sellers, a contract with a finance clause involves some risk. They must take the property off the market during the finance period, and there’s a chance the buyer won’t obtain financing, forcing them to relist. However, it’s a common and generally accepted practice that facilitates property sales and protects buyers who require financing.