SIGNING A BUILDING CONTRACT SUBJECT TO FINANCE APPROVAL
Signing a Building Contract Subject to Finance Approval – Why does the bank want a signed contract before they can approve finance?
Another question we get about this is how can I sign a contract when I don’t have unconditional finance approval?
Understandably, many of our customers use bank finance to fund the building of their new home, and it’s often a point of confusion about the timing of signing the contract and getting finance in place.
We’ve heard it before – “I’m not signing anything until I know I can pay for it!”. And that’s a fair comment. So let’s sort out fact from fear in this article! Because once you know the facts, you won’t need to fear signing a contract.
And the reason for this is that every legal building contract is subject to finance approval. The normal term for the buyer to get finance in place after signing on the dotted line is 21 days but that’s often only a nominal length of time and can be extended if needed.
One thing to understand is that signing a contract is not necessarily giving the go-ahead to the builder to start building – paying the deposit does that. Actually signing the contract is agreeing to the terms, conditions, specifications, plans and pricing. It sets the stage for everything but doesn’t actually start the show.
Every contract requires a deposit to be paid. The reason for this is to get a meaningful committal from the buyer that gives the builder the confidence to order materials, muster their forces and work on the project. It’s the payment of the deposit – generally 5% – that ratifies the contract and makes it actionable.
So if finance is required to fund the build, then the bank generally needs a signed contract for them to process the application and approve finance. When the bank sees a signed copy of the terms, conditions, specifications, etc, it gives them the confidence that what they’re basing their calculations on isn’t going to change (or at least change substantially).
So step 1, get all the detail sorted. And we mean sorted – get every ‘T’ crossed and every ‘I’ dotted. Then sign the contract. Then take a signed copy of the contract to the bank. The bank then has 21 days to approve the loan, or ask for an extension to this if needed. And when approval comes through, pay the deposit.
And that’s the firing gun for the builder – now your dream is on the way to being a reality!
Of course, if for some reason the bank is unable to approve finance, then the contract becomes null and void – it just quietly dies a natural death and life moves on without it. Obviously this is rare, because buyers approach the bank before they start the process with a builder and are aware of their ability to borrow, so when you present the signed contract to the bank, it shouldn’t really be a surprise to them.
And we’ve also seen it where one bank says no but another bank gives it the big tick of approval and all is sweet.
One tip – keep everyone in the loop along the way. You’ll find that things will run smoother if your banker, your builder and any other important person are all up to speed with things throughout the process.
Keen to find out more?
Reach out to us. We’re here to help.