The Addendum Concerning Right to Terminate Due to Lender’s Appraisal (TXR 1948, TREC 49-1) is to be used only when the Third-Party Financing Addendum (TXR 1901, TREC 40-9) is used. It is not to be used in transactions involving FHA or VA financing or with cash buyers. The addendum has three options that can change a buyer’s ability to terminate the sales contract because of an appraisal. Here’s how they work:
Under the Third-Party Financing Addendum, the buyer has the right to terminate if a low appraisal does not satisfy the lender’s underwriting requirements for the property. If your client selects this choice on the Addendum Concerning Right to Terminate Due to Lender’s Appraisal, she waives this right to terminate regardless of how far the appraisal is below the sales price. If the lender reduces the amount of the loan because of the low appraisal, the buyer must cover the difference between the loan and the sales price by bringing additional cash to close. Make sure your client understands the financial consequences.
2. Partial Waiver
If your client selects this choice, she is also waiving her right to terminate if the appraisal does not meet lender’s underwriting requirements. However, under this choice, the parties can agree on a limit of how low the appraisal can be when the waiver applies. If the appraisal is equal to or greater than the amount written in line 2(ii), the waiver applies and the buyer cannot terminate. The buyer must bring additional cash to close if the lender reduces the loan, just as in the above choice. If the appraisal is lower than the amount in 2(ii), the waiver does not apply and the buyer may still exercise her right to terminate under the Third-Party Financing Addendum. Your client should carefully choose the amount for the space in 2(ii).
3. Additional Right to Terminate
If your client selects this choice, she has an additional right to terminate the contract due to the appraisal that is separate from her right to terminate under the Third-Party Financing Addendum. Under the Third-Party Financing Addendum, the buyer’s right to terminate only applies if the low appraisal does not meet the lender’s underwriting requirements. Under this choice on the Addendum Concerning Right to Terminate Due to Lender’s Appraisal, the buyer has the right to terminate if the appraisal falls below the amount filled in line 3(i), regardless of the lender’s requirements. Make sure your client carefully considers the appraisal amount she is comfortable with and selects a period under line 3 that gives the lender enough time to obtain an appraisal.
This addendum is not required or necessary if your client is not interested in modifying her right to terminate due to the lender’s appraisal.