A Signed Contract Is Not Necessarily Needed When Applying For A Loan

  • Just recently a contact of ours wanted to purchase a property and obviously needed finance from one of the commercial banks because buying a property isn’t like buying a can of Besta tinned fish, right?  It takes time and it costs money – a lot of it.

    Our wantok actually made an agreement with the seller on the price of the property and then sort finance.  That isn’t really a good way to go about it because you should get your finance in order before coming to terms with a seller on the price. In any event, that’s best left for another article.

    The issue of concern to us is that when dealing with the bank to get a loan for the purchase, the bank asked for a contract for sale – a signed one!

    This got us a bit concerned because why would the bank need a signed contract for sale when the person seeking finance is actually asking them for funds. Logically, you don’t sign a contract if your finance isn’t ready yet. It makes no sense at all.

    This wouldn’t be a concern if the contract terms state that the contract is conditional on the purchaser obtaining finance.  But if there is no such condition, the buyer has basically committed to buying the property without certainty that the bank will approve his finance.  Many contract for sale of residential property in PNG don’t usually come with a what is known as a “subject to finance” clause.  That is, the contract if signed depends on the success of the buyer’s loan application.  If finance is not approved, then usually the consequences are nil.  This is more favorable to the purchaser.

    But many contracts, as far as the ones we’ve come across, is that they don’t have this “subject to finance” clause.  The seller assumes that by signing the contract you’ve got the funds in place to complete the sale.

    If you sign a contract without getting your finance in order and there is no such “subject to finance” clause, there is a real risk that the deposit you initially pay the seller or the agent could be forfeited and worse the seller could sue you for the balance to complete the sale.

    Perhaps the biggest point to draw from discussion is to never sign a contract because the bank wants to sight a copy as part of the loan application process.  They shouldn’t even ask for it in the first place.

    The most important thing for any buyer to do is to seek legal advice.  Each transaction is different but there are standard practices that are followed and legal advisers are your best option to make you understand the process and the risks involved.

    Your paying a lot of money, so every step should be taken with care.

    Note that this is in no way a legal advice. Just a practical example of what we’ve come across that concerns us.  Seek legal advice for your own circumstances.

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