Real Estate Contract Changes

Texas Real Estate Contract Forum – Third Party Financing Addendum

I have a clients and frankly, several agents that do not fully understand the Third Party Financing Addendum. To help you the reader, I have inluded the following information from the Texas Realtor’s Association (TAR), of which I currently serve as a member of the Board of Directors.

Prior to the adoption of the current addendum, there was considerable uncertainty as to when and how it was to be determined if the buyer had satisfied the lender’s financial requirements. Often the dispute concerning the lender’s approval would arise many days after the time period for approval under the prior addendum had expired, and the argument would be whether approval had in fact been obtained within the days specified.

In order to give all parties some certainty about this approval process, the addendum was changed to put the burden on the borrower/buyer to provide written notice to the seller within the time specified if the buyer cannot obtain the necessary financial approval. This would seem to be appropriate since the buyer is in the best position to obtain that information from the lender and, after all, it is the buyer’s contingency. If the buyer is not satisfied that he has obtained financial approval relating to his assets, income, and credit history within the time provided, the buyer must give timely written notice to that effect to the seller. If the buyer gives a timely notice, the contract terminates, and the earnest money is refunded to the buyer. If the buyer does not give such written notice to seller within that time period, the contract will no longer be subject to the buyer’s financial approval regarding assets, income, and credit history.

The addendum does not require that the buyer obtain financing approval within the specified time period. Rather, it provides an opt-out period for a buyer who does not believe he can obtain that approval.

As was the case before this change, the lender’s approval of the property as satisfying the lender’s underwriting requirements is separate from the buyer’s personal qualifications. That underwriting approval condition is covered in Paragraph 4A of the main contract forms. There is no time limit for the lender’s approval of the property under Paragraph 4A. The lender’s underwriting approval of the property can be dependent upon many factors (e.g., appraisal, required repairs, etc.), and the property must satisfy those requirements even up to the day of closing.

Note: TREC has promulgated a form for the buyer’s use in notifying the seller about the lack of financing approval: Notice Pursuant to Third Party Financing Condition Addendum (TAR 1905).