What Is “Subject to Financing” in Real Estate?
Updated November 1, 2024 by Mike Stewart PREC
In Episode 13 of the First Time Home Buyers Guide for Vancouver, we discussed Subject Clauses in general.
Today we’re going to discuss the Subject to Financing Clause in detail and how it relates to and affects a real estate offer. Chad Watts of the Mortgage Group was kind enough to come and talk to us about subject to financing.
What Does “Subject to Financing” Mean?
“Subject to financing” or subject to finance is a protective condition in a real estate offer that allows a buyer to withdraw from the purchase if they cannot secure suitable financing, typically within 7 days.
This financing generally refers to the mortgage or other financing the buyer plans to use for purchasing the property.
Importantly, the condition is subjective, meaning the buyer decides if the financing terms are acceptable. If they find the financing unsatisfactory, they have the option to cancel the accepted offer without penalty.
The subject to financing is not based on a state of fact, but rather the buyers opinion on the financing.
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Why Use a Subject to Financing in an Offer?
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Like I mentioned in Episode 13, when it comes to writing offers on Real Estate in Vancouver, SAFETY COMES FIRST!
We use the Subject to Financing Clause to protect the Buyer financially by making sure they can get a mortgage or other financing on the property they want before making the contract legally binding on the buyer.
This clause gives the Buyer has sufficient time to get confirmation IN WRITING that the financing or mortgage for the property is confirmed.
Subject to Financing allows the Lender an opportunity to appraise the property to ensure the property is worth what the accepted offer says it is and to confirm the Borrower/Buyer can afford to pay the mortgage.
Once the Lender has done this, they can give the Buyer/Borrower confirmation in writing that the financing or mortgage is approved.
Check out this great explanation of how subject to financing works.
How to Identify the Subject to Financing in the Offer
To identify the subject clauses in an offer look for clauses that start with “Subject to…”. The Subject to Financing clauses can be as simple as:
“Subject to the Buyer receiving and approving suitable financing on or before _(date)_ . This subject is for the sole purpose of the Buyer.
The subject to financing could also include details about the financing including payment amounts, amortization, and mortgage term.
Contract of Purchase for Vancouver BC Courtesy of Mike Stewart Realtor
How Does “Subject to Financing” Work?
Step-by-Step Guide:
- Include the Clause in the Offer:
When a buyer submits an offer on a property, they specify that it is “subject to financing.” This clause indicates that the offer depends on the buyer securing acceptable financing, usually within a specified number of days. By including this clause, the buyer protects themselves if they cannot obtain the financing they need. - Agree on a Timeline:
The buyer and seller negotiate a deadline—typically 5 to 10 days—by which the buyer must secure financing. This timeframe allows the buyer to complete the necessary application and approval process with their lender. The timeline must be realistic for both parties, balancing the buyer’s need for assurance with the seller’s desire to close quickly. - Lender Approval Process:
During this period, the buyer works with their lender to obtain financing. This may involve mortgage application processing, credit checks, property appraisals, and income verification. The buyer’s goal is to receive loan approval or confirmation that the financing meets their expectations for affordability and terms. - Fulfillment or Withdrawal:
- If Financing is Approved: Once the buyer’s financing is secured and meets their requirements, they can remove the financing condition. The purchase then proceeds as planned, and both parties move forward with closing the sale.
- If Financing Falls Through: If the buyer cannot secure financing or finds the terms unsatisfactory, they have the option to withdraw from the purchase. The clause protects them from financial penalties, allowing them to cancel the agreement without forfeiting their deposit.
How to Present Offers with “Subject to Financing”
Structuring Offers
Having your Realtor include a “subject to financing” clause in your offer is critical for financial protection, but it’s important to structure it in a way that keeps the offer attractive to sellers. Here’s how to achieve a balanced approach:
- Set a Realistic Timeline: Sellers are often concerned about delays due to financing conditions, so aim for a reasonable timeframe, typically 7 days, for obtaining financing. A shorter timeline demonstrates seriousness and financial readiness, while still giving you enough time to secure funding. A longer timeline may create the perception for the seller that the buyer may not be prepared or serious.
- Provide Context in the Offer: If possible, specify some of the terms of the mortgage you plan to get, showing the seller that you’ve already made financing arrangements. This can reassure the sellers that you are serious and that your approval process is underway and minimizes the risk of delays.
How Long is the Subject Period after the Accepted Offer?
Its usually 7 days. This is the time it normally takes a bank or other lender to appraise the property to ensure it is worth what the accepted offer says its worth as well as to satisfy the bank/lender of the Buyer/Borrowers ability to pay the mortgage.
This time can be shortened or lengthened in a negotiation based on the Buyers and Sellers needs, but its advisable for a Buyer to first consult with their Lender before agreeing to a shortened Subject Removal period.
FAQ on Subject to Finance
Can a Seller Refuse a Financing Clause?
Answer:
Yes, sellers can refuse or negotiate the “subject to financing” clause, especially in competitive markets. If multiple offers are on the table, sellers may prefer offers without financing conditions or may counter-offer with modifications to the clause, such as shortening the financing period. In hot markets, sellers may be less open to financing conditions as they aim for quicker, unconditional sales.
Subject to Finance Mean When Buying a House?
Answer:
When a real estate offer is “subject to financing,” it means the buyer’s ability to complete the purchase depends on securing a mortgage or other financing. This clause gives buyers a set period, often between 7 to 14 days, to confirm loan approval. If the buyer cannot obtain financing, they have the option to cancel the agreement without penalties.
What Happens If My Financing Falls Through?
Answer:
If your financing falls through, the “subject to financing” clause allows you to withdraw from the purchase agreement without facing financial penalties or forfeiting your deposit. This protection is particularly valuable in cases where unexpected issues arise, such as a change in your financial situation or an appraisal coming in lower than expected.
How Long Should I Request for Financing Approval?
Answer:
Standard timelines for financing approval in real estate transactions range from 7 to 14 days, depending on the market. In competitive markets, it may be beneficial to request a shorter timeline, like 5 to 7 days, to keep your offer appealing to sellers. However, if you anticipate a more extended approval process, discussing this with your lender and real estate agent beforehand can help you set a realistic timeline that doesn’t jeopardize your financing.
Can I Waive the “Subject to Financing” Clause?
Answer:
Yes, waiving the “subject to financing” clause is possible but comes with risks. Buyers sometimes waive this condition in highly competitive markets to make their offer more attractive. However, if financing falls through after waiving the clause, you could be obligated to complete the purchase or forfeit your deposit. This strategy should only be considered if you’re confident in your financial readiness or have a solid mortgage pre-approval.
What Does “Subject to Finance” Protect Me From?
Answer:
The “subject to finance” clause protects buyers from financial risk by allowing them to cancel the offer if financing cannot be secured. This safeguard ensures that buyers are not forced to complete a purchase they cannot afford. If the terms of the mortgage don’t meet the buyer’s requirements or the lender denies the loan, the buyer can withdraw without financial consequences.
Keywords: subject to finance protection, subject to financing in real estate
Subject to Financing Pro Tips
1. Submit Your Accepted Offer to Your Lender as Soon as its Accepted!
As soon as you get an accepted offer, email it to your lender right away and then call them to confirm receipt. The faster you get the accepted offer to the lender, the faster the lender can get you your mortgage approval. In a competitive market, if there are delays in the financing, sellers may not offer an extension on the subjects, which may result in a buyer losing out on a their dream home.
2. Get Pre-Approved for a Mortgage to Strengthen Your Offer
Sellers are more likely to accept an offer with a “subject to financing” clause if they see that you have pre-approval from a lender. Mortgage pre-approval shows you’re financially prepared, reducing concerns about financing delays. Including a pre-approval letter with your offer can also make it more competitive in a busy market.
3. Keep the Financing Timeline Short in Competitive Markets
In highly competitive markets, consider requesting a shorter financing period—such as 5 to 7 days—instead of the standard 7 to 14 days. A shorter timeline demonstrates that you’re serious about the purchase and have already made financing arrangements, which can make your offer stand out.
4. Discuss Alternative Financing Options with Your Lender
If your primary loan application faces unexpected challenges, having a backup plan with alternative financing can help you meet the financing condition. Discussing options such as bridge loans or personal lines of credit with your lender may provide a safety net if the initial mortgage is delayed or falls through.
5. Consider Offering a Larger Deposit to Offset the Financing Condition
Offering a larger deposit can make your offer more appealing even if it includes a “subject to financing” condition. A substantial deposit demonstrates commitment and financial readiness, which can help the seller feel more comfortable with the financing clause.
5. Be Prepared for Appraisal Requirements
Lenders often require an appraisal to confirm the property’s value before approving financing. Ensure that the property meets the lender’s standards, especially if you’re offering above the asking price in a competitive market. Preparing for this step can help prevent delays in obtaining financing approval.
6. Don’t Waive the Clause Without Careful Consideration
Waiving the “subject to financing” clause is a tactic some buyers use to make their offer more competitive, but it comes with risks. If financing falls through after waiving the condition, you may be obligated to complete the purchase or lose your deposit. Consider waiving the clause only if you have a solid backup plan and are confident in your financing approval.
Stay tuned for Episode 15 of the First Time Home Buyers Guide for Vancouver when when we will discuss Subject to Inspection!
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