Legal FAQs for REALTORS®
— Contracts and Forms
TREC Third Party Financing Addendum
How does the Third Party Financing Addendum for Credit Approval work? (updated Aug. 2, 2016)
The addendum provides the buyer the ability to terminate the contract if he provides written notice to the seller if he cannot obtain credit approval within the time specified in the addendum. Note that the addendum doesn’t require the buyer to obtain credit approval within the specified time period, but provides an opt-out period for a buyer who is unable to obtain credit approval within the specified time period.
What can a buyer do if he is unable to obtain credit approval in the time provided in the Third Party Financing Addendum? (updated August 2, 2016)
If the buyer cannot obtain credit approval and she wants to exercise her right to terminate the contract, she must give written notice to the seller within the time period provided in the addendum. She can use the Notice of Buyer’s Termination of Contract (TAR 1902, TREC 38-4) for this purpose. If the buyer gives timely notice, the contract terminates, and the earnest money is refunded to the buyer. If the buyer doesn’t provide the notice within the time required, the contract will no longer be subject to the addendum and the buyer could end up in breach of the contract if she is unable to obtain credit approval.
My client received an offer on her home in which the first box in Paragraph 3B is checked indicating that the contract is not subject to the buyer being approved for financing. However, the buyer attached a completed TREC Third Party Financing Addendum to the contract. What should we do with this offer? (Updated Feb. 13, 2015)
With your client’s agreement, you should ask the buyer’s agent to clarify the buyer’s intention and require the buyer to resubmit an offer that clearly indicates the buyer’s intent.
The TREC Third Party Financing Addendum should only be attached to a contract in which the first box in Paragraph 3B is checked. This contract does not clearly express the buyer’s intended offer.
Is it appropriate to fill in one of the sections of the TREC Third Party Financing Addendum (TAR 1901) with something like market in the space for the maximum interest rate permitted for the loan contingency or to leave the percentage amount blank for the maximum loan fees permitted for the loan contingency? (updated Aug. 2, 2016)
The Third Party Financing Addendum is designed to limit the maximum amount of interest and loan fees that a buyer would be obligated to pay as part of his loan contingency. Inserting the word market in lieu of a stated interest rate or leaving a blank space for the maximum loan fees would defeat the purpose of the loan contingency. The market interest rate might be several percentage points higher than the buyer intended, assuming it was possible to to determine what the market rate was at a particular time in the contracting process. Similarly, a buyer might be required to pay a much greater amount of loan fees than he intended if that figure was left blank and a court imposed a "reasonable" or "market" test to determine the amount of permitted loan fees. TREC and the Broker Lawyer Committee intended that percentage figures would be inserted in these two blanks or they would not have promulgated the form with percentage signs after the blanks. Clarity in contracts requires that buyers research what the current market allows for interest rates and loan fees, which are defined in paragraph 12A(2)(a) of the TREC contracts, and that those percentage figures are inserted in the appropriate blanks. Ambiguity or unenforceability of contracts can be avoided by careful attention to inserting appropriate percentage figures in these blanks.
Can the lack of the lender's underwriting approval of the property still result in the termination of the contract even though the time has already passed for the buyer to give notice to terminate the contract under the Third Party Financing Addendum? (updated July 13, 2016)
Yes. Under the Third Party Financing Addendum, the buyer has a certain number of days within which to give the seller written notice that the buyer cannot obtain financing approval. Financing approval in this case means that the terms of the loan described in the addendum are available and that the buyer has satisfied all of the lender's financial requirements relating to the buyer's assets, income, and credit history. If the buyer does not give the seller such a notice within that time period, the contract will no longer be subject to or contingent upon the buyer's financing approval for the described loan and the buyer's assets, income and credit history. No such time limit restricts the lender's underwriting approval of the property under Paragraph B2 of the addendum. The lender's underwriting approval of the property can be dependent upon many factors (e.g., appraisal, required repairs, etc.) and must satisfy those requirements even up until the day of closing. This time distinction is important. Under the Third Party Financing Addendum, if the buyer gives the notice within the days stated then the contract terminates and the earnest money will be refunded to the buyer. A failure by the buyer to give the timely notice means that a subsequent failure to obtain the financing approval for the type of loan described and the buyer's financial requirements would not allow for the automatic termination of the contract and refund of the earnest money to the buyer. Conversely, no matter when the lender determines that the property does not satisfy the lender's underwriting requirements for the loan, the contract terminates and the earnest money should be refunded to the buyer.
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