A seller accepted a contract with conventional financing and a full appraisal waiver. The buyer now wants to switch to FHA/VA financing. Does the seller have to allow the buyer to make this switch? Can the seller terminate? Can the buyer terminate if they are unable to obtain FHA/VA approval?
No to all questions. Generally, as long as the buyer produces funds at closing, the buyer may switch financing types. However, if the buyer is attempting to switch from conventional financing to FHA/VA financing, the lender will require an executed amendatory clause. Since the seller did not originally agree to allow the buyer to pursue FHA/VA financing, the seller may refuse to sign the amendatory clause, which could prevent the buyer from obtaining approval for this financing type.
There is no provision in the One to Four Family Residential Contract (Resale) (TXR 1601, TREC 20-16) that allows the seller to terminate due to the buyer attempting to switch financing. If, however, the buyer is unable to obtain the FHA financing and cannot otherwise produce the funds to close pursuant to Paragraph 9 of the contract, the seller—as the non-defaulting party—would have the right to exercise the remedies available in Paragraph 15 of the contract.
Lastly, since the Third Party Financing Addendum (TXR 1901, TREC 40-9) only provides the buyer the right to terminate for the financing type reflected in Paragraph 1 of the addendum, the buyer will not be able to terminate for failing to get FHA/VA approval, unless the seller agrees to add a new addendum to the contract stating the buyer is seeking FHA/VA financing.
My buyer switched from conventional to FHA. We are closing on Friday.
Considering the detailed answer to this question was no, please provide some details as to how your Buyers situation resulted in being able to switch.
Right, the detailed answer to the questions was “No”. Does the seller have to allow the buyer to make this switch? No, but their FHA funding will complete the transaction. Can the seller terminate? No, so they didn’t. Can the buyer terminate if they are unable to obtain FHA/VA approval? No, but they’re not failing to obtain approval. The only outstanding question is in regards to the FHA amendatory clause and if that was signed by the seller, or if the funding will happen tomorrow without it.
I just closed on the 15th under the exact circumstances. We intended to close using Conventional, but do to unforeseen circumstances that became no longer an option and FHA was the only option. So we had to have the Seller’s sign the Amendatory Clause, “or if the funding will happen tomorrow without it.” my response to your statement is the funding could not have happened without the Seller’s signature.
This is an awesome little bit of information thank you for the clarification on this oft misunderstood document.
Appraisal waiver not allowed on FHA/VA
Yes it is, if the buyer has the funds.
No it isn’t, states it right on the form.
You are correct
No, the waiver is not allowed (see top of the addendum), but the buyer has the right to exercise 4B of the Third Party Financing Addendum, which is to bring the difference to closing. But they do not waive their right to terminate.
But that extra cash has to be disclosed on the final statement
The FHA addendum is not part of the contract… the only way this deal is going to work is if the Seller signs the Amendatory Clause and the Buyer has all necessary funds. Otherwise the Buyer will be in default. Does the Seller have to allow the FHA financing? No… not if he does not want to. Can the Seller allow the FHA? Yes. If he wants to.
can the change from FHA to conventional be changed using “other modification” paragraph on amendment? I have to change closing date and up date repairs and wanted to use same form for all 3?
Yes it is, we do it all the time on Reverse FHA purchase
BUT…can a buyer switch from a cash offer to using financing? We are seeing buyers make a cash offer to win the deal using false pretenses only to see them switch to financing at the last minute. This is unfair to the seller who may not have accepted their offer initially. Many sellers take a lower cash offer over a higher offer using financing so this seems no be not only deceptive but unethical.
Wholeheartedly agree, Frank. It almost appears to be a purposeful sales “tactic” just to get an offer accepted in a multiple offer situation. This would be an equally worthy question for Texas Realtors Staff to address and provide some education/guidance.
It definitely is a sales tactic. However, if I am showing you proof of funds that I can close on your house and pay cash, but later decide I want to save my funds and use someone else. Why shouldn’t I be able to if it doesn’t change anything for you as the seller? If you bottom line doesn’t change at all and all other terms of the contract are met! What’s the problem here? The seller gets cash at closing anyways no matter how the buyer is paying. So it shouldn’t matter to the seller. The only time it… Read more »
The problem is just as described above. The seller will often accept a lower offer because it is cash and in our area, at least, will close about a month earlier than a loan contract. That is a deceitful practice and should not be encouraged by any agent.
The closing date can’t be changed unless the Sellers agree, so ii they switch to lender financing they still have to close on the original date per the contract, so that shouldn’t be a factor.
I certainly understand why a buyer may want to change from cash to financing, but this could also be viewed by the seller as a “Bait and switch”. As the agreement was cash not financing, which could possibly come with more contingencies and seller may have accepted a lower offer for a cash sale. Since the seller did not originally agree to allow the buyer to pursue financing, the seller may refuse. the seller—as the non-defaulting party—would have the right to exercise the remedies available in Paragraph 15 of the contract.
The seller may refuse to sign the ammendment (it would be required) or the third party financing document.
Then be honest upfront and submit offer as financing not as cash. It does have an affect on the duration of transaction and possibly affect the net profit.
What if I took a lower price due to the buyer wanting to pay cash.
The issue with switching from Cash to Financing is that a Seller may have been induced to accept a lower offer with Cash due to a higher degree of certainty than with a Financing offer. What if the Seller accepted an offer $20-30k less with a “Cash” offer, only to find out later in the process that it was Financing all along. Could the Seller claim to be harmed by a Deceptive Trade Practice??? That would be a great question for a TAR bulletin as well…..
I am not seeing cash offers coming in lower. However with that being said I would think if a buyer is switching from cash to financing and they showed proof of funds to purchase then a full appraisal waiver would be the key here. At the end of the day financing or not it is all cash to the seller. As long as the sellers bottom line isn’t changing at all when the buyer switches financing what does it really matter? I can see where switch from cash or conventional to fha or va would be a problem. But switch… Read more »
Cash buyers often offer less (“Cash is King” mentality). And Sellers often accept lower offers that are cash for various reasons including less risk.
Seller may wish to make sure closing date isn’t set to 30+ days with any cash offer they consider accepting. Not that this would be a 100% indicator, but could be a red flag the buyer isn’t really planning on closing with cash.
It could definitely take a buyer 30 days or more to get funds if they are trying to pull for other sources ie selling another house, pulling from retirement. Either way the bigger problem isn’t switching financing. The bigger problem is their are ethical issues going on in our industry. There is also the lack of education some have. There is also the issue of giving our clients the wrong information due to our lack of education. Because at the end of the day if the bottom line for a seller is the same on all transactions. Then why is… Read more »
Many great replies, thank you! There are several scenarios where this can play out in different ways. Some folks may need more than 30 days because of moving or other reasons, and although if it closes in the end all is well, I think this is still a great topic for further discussion with TREC because of the ethics violations it introduces. If an agent knowingly enters into a contract under false pretenses to win a deal over other financed deals by saying they are using cash, and they know it’s going to be financed, this is a problem for… Read more »
I agree with that reasoning!
I agree. Totally unethical.
Frank, to remedy this if I were in the sellers agent role, request a proof of cash or proof of actual cash funds, letter, prior to the seller signing. Basically be more diligent on finding the buyers actual CASH, prior to accepting an offer. Thanks for bringing this up, as it is very real world happenings stuff.
George, I agree and I’m dealing with a transaction where we did this very thing. Now in the final week before closing we find out through the title company that the buyer has switched to financing (we never got notice from the other agent). I won’t bore you with details but the other party was incredibly deceptive throughout the transaction. The first clue was wanting to have an appraisal done and when asked about why (since it was a cash transaction), we got a runaround excuse about them doing something after the property had closed but they needed the appraisal… Read more »
There is a lot of that! Even the Title Company is saying, no problem, they do that a lot. It is still a lie.
I always suggest to my cash Buyers to get an appraisal, for their own comfort. However, in your case it sounds like they used “cash” to get the deal and intended to get a loan all along. Shame on their Realtor for using that strategy!
There’s another layer that can be added as well. Think of the seller who loves their home or ranch. Maybe it has been in the family for generations with many precious memories. Or perhaps the sellers doesn’t want to sell but needs to . . . The seller carefully considers the offers on the table and decides who to sell to based on many factors. Then the seller learns that the buyer was purposefully dishonest and actually trying to deceive them to get what they wanted. The list agent may have to tell their seller that if the buyer can… Read more »
Agreed, proof of funds on a cash transaction is like getting a pre qualification letter from lender. Both could be conditional.
If they win with a cash offer, I would hope you verify proof of funds. Then if the buyer prefers to use borrowed funds rather than cash , I don’t see it as a problem. He would not have an out for financing.
You’d still need to add the Third Party addendum to the contract, you cannot have financing without including them as a party to the contract as they have rights held within the Third Party Addendum.
Great question. I am seeing this too.
It really doesn’t change a thing depending on how the original contract was written and the Buyers are switching to Conventional which allows the waiver of appraisal. First no good Seller’s agent would accept a cash offer without proof of funds, the closing date can’t change unless the Sellers agree and the Sellers require the Buyers to sign an appraisal waiver.
Very much agree. I have had clients putting down 50% and financing with an FHA Reverse. VERY well qualified borrowers wanting to retire in the home. Simple financing deal. They lose to cash buyers, then we find out later the deal fell through because they really did not have that much cash or they went to a less costly home. Very frustrating. While I hope this market cools, I feel there should be some kind of penalty if they do that.
Excellent information that is very much needed to be distributed.
Seems like a way that a Buyer can wiggle out of the appraisal waiver…. IF the Seller agrees to the FHA amendatory clause. This was less of an issue before the Addendum Concerning Right To Terminate Due To Lenders Appraisal’ form.
If all the buyer has to do is show up with the mo ney, why not write all offers at 90% cash if you know you can make the switch to 5% down at closing. This seems intentionally deceitful at best and would be hiding the buyer’s true financial position. I don’t see how a seller could not have the right to back out and tale a higher backup offer for example.
Confused and thinking DTPA
Good info, but it did not cover the HEADLINE of the article. Can a buyer change financing sources? The headline is not talking about changing financing programs. This seems like a new headline was assigned yesterday’s article. I’m very interested in today’s HEADLINE and its answer.
Texas is behind the times on this. The current contracts do not adequately protect sellers. I believe this is “fraudulent inducement.” Seller may not have entered into a contract with Buyer if Buyer was intending to obtain a different type of financing. This needs to change. Seller has every right to know how Buyer will be funding the transaction. Not knowing places an inequitable risk upon Seller.
I disagree that there’s no harm-no foul in switching the financing source so long as the Buyer shows up with money to close. Para. 1 of the Third-Party Financing Addendum contains agreed contract terms, and those terms tie in to whether the Buyer can obtain Buyer Approval under para. 2.A. If the Buyer changes their financing program without the Seller’s written consent via an amendment, isn’t the Buyer violating the contract’s terms, i.e., breaching the contract? The Seller may or may not care, but that is a different story. If the Buyer agrees to do one thing but then actually… Read more »
My question : is it legal for a Realtor doing the work of a not licensed appraiser to grill the homeowners and their agent on when updates were done? For the purpose of giving the information to an appraiser in connection with a loan approval.
Seeing this and experiencing this (first hand) exact scenario in California, it’s a cheap shot on a buyers part to win the bidding war.
There are several specific items in the initial question: Conventional with appraisal waiver and now changing to FHA /VA financing which does not allow an appraisal waiver. That is the first scenario. The next question is can the seller terminate? Next question is can the buyer terminate based upon the appraisal? The last question depends upon if the transaction moves forward with the proper amendments. The issue of cash is a totally different issue. There are “cash” offers that are not real cash offers. They are hard money offers and many agents have no idea what hard money is. That… Read more »
If the buyer is switching from cash to financing, would it be ok for the seller to require an additional non refundable earnest money from the buyer in the form of an amendment? Reasoning being to at least provide the seller some recourse if the buyer terminated due to appraisal under new financing terms given that the seller could have gone with a different and higher buyer had they been aware it was going to be financed. Just a thought and curious what anyone else thinks.
Absolutely the seller can ask for additional EM when an addendum for financing is added. Example FHA, VA that requires an appraisal. Anytime a contract is altered, it’s open to change from either party.
What if the buyer comes in with a cash offer then changes to financing?
I had these exact dynamics happen with a transaction in 2021. The Seller agreed and signed the clause. However the Appraisal came back with a $55,000.00 value dollar deficit. We formally requested ARV and it returned exactly the same. My Buyer chose not to pay the differnce, and the Earnest Money was released.
Along that line….. my listing clients accepted a cash offer. One week before closing the Title Co informed me (seller’s agent) they were waiting on an appraisal and the lender’s documents. The agent refused to submit an amendment snd Third party financing…. said they did that all the time. Now what?
If the buyer signed a full appraisal waiver, wouldn’t the seller be able to terminate based on the fact that you cannot waive appraisal on FHA loans?
I don’t believe so….