Do you have to secure bond approval before a sale agreement?

Many sale agreements require the purchaser to secure bond approval before the agreement becomes binding. Sometimes it is not clear when this is actually obtained because there are different stages to the bond approval process.

When is your sale agreement secured by a bond?

Sale agreements often use terms such as “Pre-approval”, “Approval in Principle”, “Bond Granted or Approved”. And sometimes a reference to a quotation or offer letter in terms of the National Credit Act.

What does “Pre-approval” mean?

Pre-approval is when the financial institution uses basic information available to it to evaluate the highest value of bond you can qualify for in terms of your income and expenses . Pre-approval is research potential buyers do before making an offer on a home. Not all financial institutions process pre-approval applications as they require a signed sale agreement or accepted offer to purchase. Pre-approval is not sufficient for the purposes of a sale agreement because there is no guarantee the financial institution will proceed with a bond once it does a formal affordability assessment.

What does “Approval in Principle” mean?

Approval in Principle means the financial institution has done a thorough search into your financial circumstances and has approved an amount for a bond based on your personal affordability. A financial institution will only do this type of evaluation after an offer to purchase or a sale agreement for a property has been accepted by the seller. At this stage the bond is still not approved/granted as the financial institution still has a requirement to do a valuation of the property to be bonded and whether the property will provide enough security for the financial institution.

What does “Bond Granted or Approved” mean?

Bond Granted or Approved means the financial institution has done its search into your personal affordability as well as the valuation of the property and found it to be sufficient security for providing financial assistance.

And a “National Credit Act Quotation”?

NCA Quotation has the same effect as Bond Granted or Approved. It means the financial institution has assessed you and issued a formal quotation in terms of section 93(2) of the National Credit Act. This quotation is binding on the financial institution for 10 days and requires acceptance by the purchaser before the financial institution will instruct its attorneys to proceed with the bond registration process.

Therefore, your sale agreement needs to be specific on when the condition relating to bond approval is actually met. If the agreement refers to “Pre-approval” or “Approval in Principle” there is a risk that the purchaser will be locked into a sale agreement and, if the financial institution subsequently declines the bond, find him/herself unable to come up with the purchase price. If the sale agreement is then cancelled because the purchaser cannot fulfill its obligations, the purchaser may still be liable for estate agent’s commission or other damages the seller may suffer.

Should you be unsure about when the condition relating to bond approval is actually met (or should you have any other queries about your sale agreement), please feel free to contact us before you sign the sale agreement.