Are you using the third-party financing addendum correctly?

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12/18/2014 | Author: Editorial Staff

If box 4A(2)(b) is checked on TREC contracts, do I need to use the Third Party Financing Addendum for Credit Approval?

No. Since checking this box indicates that the buyer is not making his contract contingent upon his personal-financing approval, it would be inappropriate to attach the Third Party Financing Addendum for Credit Approval (TAR 1901, TREC 40-6), which describes that contingency.

If the buyer wants to make the contract contingent on loan financing, he must check the box in 4A(2)(a) and attach the Third Party Financing Addendum for Credit Approval to the contract when making the initial offer. By checking the box in 4A(2)(b), the buyer will not have the protection that the Third Party Financing Addendum for Credit Approval offers in terms of terminating the contract if he is unable to get approved for the loan.

Note there is no reference to attaching the addendum in the language of paragraph 4A(2)(b) like there is in paragraph 4A(2)(a). It was drafted this way to clarify that no addendum should be attached when paragraph 4A(2)(b) is checked.

Read more legal questions and answers on texasrealestate.com.

Categories: Legal
Tags: legal faq, third party financing addendum


Comments

George D. Felam on 12/21/2014

Is it me or am I misunderstanding the answer to the question.  There is no box to check under 4.A.1, and 4.A.2.a specifically states “This contract is subject to Buyer being approved for the financing” and specifically refers to the TPFA.

Amanda Thomas on 12/19/2014

Richard Weeks addresses an issue that begs TAR & TREC attention concerning this particular promulgated form, and the wording of this article.

The article states, “By checking the box in 4A(2), the buyer will not have the protection that the Third Party Financing Addendum for Credit Approval offers in terms of terminating the contract if he is unable to get approved for the loan.” 

The Addendum (as currently written) specifically provisions to protect a Buyer for Credit Approval— conditioning for (1) availability of loan terms, and (2) satisfaction of lender’s requirements relating to Buyer’s assets, income and credit history.

It does not condition for LOAN approval.  TAR’s legal counsel has previously confirmed that there is a difference between credit approval and loan approval, and the two conditions should NOT be used interchangeably.

The terminology is confusing, and Realtors who understand and practice using the TPFA to protect a Buyer for LOAN approval (the majority) are also in jeopardy of misusing the Release of Earnest Money form, by inappropriately submitting a demand earnest money when it would otherwise be rightfully due to a Seller.

Point in Case: A Buyer who has been pre-approved & has achieved Credit Approval (as defined by lenders) while under contract could still be declined for loan approval if, for example, he is later caught lying about information relating to his application (identity / citizenship status), or if he gambles away his down payment / savings a week before closing.

Camelia Perez-Hernandez on 12/18/2014

Absolutely, the buyer can terminate the contract and earnest is refunded to the buyer.  Read paragrapgh 4.A.(1)

Richard Weeks on 12/18/2014

Nathan Bell, look at paragraph 4.A.(1) where it talks about Property Approval and it makes mention of the property meeting the lenders underwriting requirement.  Credit approval and Loan Approval are 2 different things.

Nathan J Bell on 12/18/2014

If 4A(2)is checked and the buyer is qualified but the financing is turned down due to the property (whether appraisal or condition etc.) does the buyer have an out?  I am assuming at this point the time has expired on the option.  What protection does the buyer have?


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The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. Applicability of the legal principles discussed in this material may differ substantially in individual situations.

While the Texas Association of REALTORS® has used reasonable efforts in collecting and preparing materials included here, due to the rapidly changing nature of the real estate marketplace and the law, and our reliance on information provided by outside sources, the Texas Association of REALTORS® makes no representation, warranty, or guarantee of the accuracy or reliability of any information provided here or elsewhere on texasrealestate.com. Any legal or other information found here, on texasrealestate.com, or at other sites to which we link, should be verified before it is relied upon.

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