Loan clauses are often included in sales contracts to allow the buyer to back out of the purchase if their loan was not approved within the set deadline, and have any deposits returned to them in full. 

These days, most sellers will require that the buyer obtain pre-approval from a bank prior to signing a sales contract. Even if you have received loan pre-approval, it is strongly recommended that you make sure there is a loan clause in the contract. This will protect you in the event that the bank does not provide full approval, or only partially approves the loan.

What happens if you don’t have a loan clause?

If, for whatever reason, you are unable to get the financing you need and are unable to come up with the cash to complete the purchase, you will have to cancel the sales contract and lose your deposit. In some cases you may be liable to pay the seller a penalty or damages on top of this.

Deposits are typically 10% of the purchase price, while the penalty can be up to 20%, which means you could end up paying as much as 20% if things do not go as planned.

Even with a loan clause, you may not be completely off the hook

The loan cancellation clause is only applicable if the buyer made every possible effort to complete the necessary procedures so that their bank could carry out the loan approval in a timely manner. If the buyer lied on the paperwork or submitted false documentation to the bank, and the loan was not approved as a result, or the buyer had intentionally delayed or held up the approval process in order to have the loan rejected, the loan cancellation clause will not apply and the buyer may forfeit their deposit. 

In other words, if you have signed a sales contract and change your mind afterwards, doing something to get your loan rejected so that you can nullify the sale and get your deposit back is generally not going to work.