Clarity regarding the Third Party Financing Condition Addendum’s protection
published on February 1, 2011
There is often confusion between buyers and sellers regarding the Third Party Financing Condition Addendum (financing addendum) commonly used as an addition to a property purchase contract. This financing addendum allows the buyer to terminate the contract in the case that the buyer is not able to obtain financing approval from a lender. The confusion comes in as to exactly how the financing addendum protects the buyer as opposed to paragraph 4 (A) (1) of the Texas Association of REALTORS® One to Four Family Residential Contract (Resale), which states that “Property Approval: If the Property does not satisfy the lenders’ underwriting requirements for the loan(s), this contract will terminate and the earnest money will be refunded to Buyer.”
When negotiating a purchase contract, it is common for a listing agent and/or seller to push to shorten the financing addendum to a term as short as possible. The goal is generally to push the buyer to work diligently to get financing approval so that the home does not sit off the market too long if the loan is not approved. On the other hand, a buyer wants and often needs as much time as necessary to obtain financing approval. Aside from the need for the buyer to work diligently in getting the lender the information that the lender needs to approve the loan, the time it takes a lender to underwrite a loan is mostly out of the hands of a buyer. With lender underwriting requirements that have become more strict since the beginning of the recession that started at the end of the year 2007, the time it takes for a lender to complete the underwriting process is often much longer than in the past. For a 30 day contract-to-close, it can often take a lender most or all of the 30 days to get a loan underwritten. As a result, buyers are asking for more time on their financing addendum up-front to protect them in the case that the loan is not approved. Otherwise, buyers are asking for the financing addendum to be extended once they realize that they do not have financial approval from the lender upon expiration of the financing addendum. However, sellers are often pushing back, which puts the transaction in jeopardy of being terminated by the buyer. In many cases, deals are lost due to the unwillingness of a buyer or seller to be flexible on the terms of the financing addendum.
An attorney with the Texas Association of REALTORS® legal hotline provided clarity on this matter to me. I was told that paragraph 4 (A) (1) of the Texas Association of REALTORS® One to Four Family Residential Contract (Resale) only protects the buyer if the loan is not approved due to lender underwriting requirements related to the property condition such as 1) appraisal 2) insurability and/or 3) lender required repairs. Paragraph 4 (A) (1) does not however protect the buyer if the lender does not approve the loan due to the buyers finances not meeting lender underwriting requirements. The third party financing condition addendum does provide the protection related to the buyer obtaining lender underwriting requirements based on the buyer’s finances. As such, it is critical for a buyer to have the third party financing condition addendum term terminate at a date following the lender providing the buyer with loan approval based upon the buyers finances.
The challenge comes in when a buyer or seller is trying to determine from the lender if and/or when the loan is actually approved. While a lender may state that a buyer is approved for a loan, the loan is rarely actually approved until all lender conditions are met. Lender conditions are typically the last items to be approved by a lender, which often occurs just days before a scheduled closing. Whether the conditions are related to the buyer’s finances or the property condition is not always easy to verify with a lender, but is important as to whether the financing addendum needs to be extended. This is where things can get sticky in negotiations between a buyer and seller. As would be expected, a seller will fight for the financing addendum to expire while the buyer will fight for the financing addendum to be extended as long as needed to protect them from losing their earnest money or getting sued. Since lenders are not required to divulge information to sellers about a buyer’s loan and it is often difficult for even a buyer to get timely and accurate information from a lender, the water is muddied and the debate between buyers and seller about the term of the financing addendum continues.
Obviously it is important that the buyer is working in good faith and diligently to obtain lender financing approval in a timely manner. If the Third Party Financing Condition Addendum is about to expire and the loan is not approved by the lender relating to the buyer’s finances, then the buyer’s only option is to extend the financing addendum and stay protected or let the financing addendum expire and be at risk. If the financing addendum expires and the loan is not approved due to the buyer finances, the buyer is at risk to be sued by the seller for specific performance and will lose their earnest money. If the buyer and seller are working in good faith to make the deal work, the termination of the contract for this reason is a lose-lose situation for both parties. The buyer does not get the house and the seller does not get the house sold. If both the buyer and seller are working in good faith to close the sale of the home in a timely manner, then cooperation regarding the term or extension of the Third Party Financing Condition Addendum makes sense.
This article has been provided by Austin luxury REALTOR® Brian Talley of Regent Property Group LLC. Brian Talley provides information and real estate services regarding Lake Austin homes for sale and Austin luxury homes for sale. Please note that Brian Talley is NOT an attorney and the above information is subject to errors, omissions, and changes. Brian Talley and Regent Property Group LLC do not in any way guarantee the accuracy of the information in this article. For further clarity on the subject matter the reader is encouraged to consult an attorney.
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