How does the Third Party Financing Addendum (TXR 1901, TREC 40-9) work?

The addendum allows the buyer to terminate under certain circumstances if he cannot obtain credit approval or if the property does not satisfy the lender’s underwriting requirements.

For a contract where the first box in Paragraph 2A of the Third Party Financing Addendum is checked, what must a buyer do to terminate the contract if she is unable to obtain credit approval?

If the buyer cannot obtain credit approval and she wants to exercise her right to terminate the contract under the Third Party Financing Addendum, she must give written notice to the seller within the time period agreed to in the addendum. She can use the Notice of Buyer’s Termination of Contract (TXR 1902) for this purpose. If the buyer gives notice within the time required, 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 where the contract is not subject to the buyer being approved for financing. However, the buyer attached a completed Third Party Financing Addendum to the contract. What should we do with this offer?

With your client’s agreement, you should ask the buyer’s agent to clarify the buyer’s intent and require the buyer to resubmit an offer that clearly indicates that intent. The Third Party Financing Addendum should be attached only to a contract in which the first box in Paragraph 3B is checked. 

Is it appropriate to fill in one of the sections of the Third Party Financing Addendum with “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?

No. The Texas Real Estate Commission and the Broker-Lawyer Committee intended that a percentage would be inserted in these two blanks. That’s why the form was promulgated with percentage signs after the blanks, and the parties risk ambiguity or unenforceability of contracts by not inserting appropriate percentage figures in these blanks. 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” instead 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 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.

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?

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.

What must a buyer do to terminate the contract if the property does not satisfy the buyer’s lender’s underwriting requirements for the loan?

To terminate the contract based on failure to obtain property approval, the buyer must, not later than three days before the closing date, give the seller a written notice of termination and a copy of a written statement from the lender setting forth the reason for the lender’s determination.