Third Party Financing Condition Addendum

More questions and answers.

I negotiated a few contracts in which the number of days in the Third Party Financing Condition Addendum equalled the number of days in the option. Does the buyer need the addendum if the option period is the same or longer than the number of days under the addendum?

No. The option gives the buyer the unrestricted right to terminate. The addendum creates a contingency for the buyer to obtain financing approval of his financial condition within the time specified. Under the addendum, the buyer must give the seller notice of termination if the lender does not approve the buyer within the time specified. If the buyer does not terminate within the time specified, the financing contingency expires or is waived. Under the facts in this question, it doesn’t matter if the buyer terminates under the addendum or the option, since the time periods match. The buyer needs to watch the clock and be confident that the lender has approved him within the time required, or the buyer needs to be willing to take the risk.

The only advantage of including the addendum in the contract under the facts in this question is that it may be easier to extend the time period under the addendum if an extension is needed.

The mortgage broker told the buyer that his income, creditworthiness, and assets were sufficient for approval. The buyer let the time period under the addendum pass. A few days before closing, the lender informed the buyer that, because of a credit issue, the buyer was not approved for the loan he applied for, but he could obtain approval for a loan with a significantly higher interest rate. The buyer wants to terminate the contract. May he do so? The option period expired.

Not under the facts of this question. The time period in the addendum passed. There is no longer a contingency for the lender to approve the buyer for financing. Under these facts, the buyer will be in breach and the seller could exercise his remedies under paragraph 15 if the buyer does not close.


What type of assurance should the buyer obtain from his lender that the lender has approved the buyer for the loan under the addendum?

If the buyer is using a mortgage broker, the buyer should secure a Conditional Approval Letter. The Texas Savings and Loan Department requires mortgage brokers to use the promulgated Conditional Approval Letter when communicating approval of the buyer. The letter generally states that the buyer has applied for a loan (which is described in the letter), the lender has reviewed the buyer’s credit history, the lender has obtained verifications, and the lender has approved the buyer subject only to property-related items. The use of the promulgated letter is beneficial because it was drafted to work specifically with the addendum. Lenders who aren’t mortgage brokers should be willing to draft similar letters. Visit the Forms section of TexasRealtors.com for a copy of the promulgated Conditional Approval Letter.

Does the buyer have any recourse against a mortgage broker or other lender if the broker or lender told the buyer that he was conditionally approved, and the buyer is later rejected by the lender’s underwriter because of the buyer’s financial condition?

It is possible that a mortgage broker or lender may have acted wrongfully (negligently or intentionally). In such a case, the buyer may file a complaint with the Texas Savings and Loan Department if the lender is a mortgage broker. If the lender is not a mortgage broker, the buyer could file a complaint with the Texas Finance Commission. Additionally, the buyer could pursue private remedies, but would need to speak to his attorney about such remedies. Most reputable lenders report that quick and reliable conditional approvals which satisfy the buyer’s needs under the Third Party Financing Condition Addendum can be obtained within a few days and can be relied upon, provided that the buyer provides all necessary documents and other information to the lender.


The time passed in the addendum for the buyer to terminate. A few days before closing, the lender reported that the appraisal came in low. The lender would not make the loan with the amount the buyer was to put down as per the contract. The buyer was not willing to put more down. The seller tried to assert that the buyer had waived the financing contingency in the addendum and, therefore, was in breach of contract. Was the buyer in breach of contract?

No. Under this question, the lender was not willing to make the loan because the property did not meet the lender’s underwriting requirements under the terms of the contract. Paragraph 4 of the contract provides: “If the Property does not satisfy the lender’s underwriting requirements for the loan” the contract will terminate. This means that the contract is subject to the lender accepting the property as collateral for the loan. This provision continues until closing. The contingency under the addendum relates only to the lender approving the buyer for the loan—determined by his creditworthiness, income, and assets.

Recall that loan approval is not financing approval, and the addendum uses the term financing approval. Loan approval is the unequivocal statement by the lender that the lender is ready to fund without further conditions. To grant loan approval, the lender must be satisfied in two general areas: the buyer’s ability to repay the loan—determined by creditworthiness, income, and assets—and the collateral, which is the property. The addendum defines financing approval to mean the first item, which is related to approval of the buyer, not the property.

Ron Walker is director of legal affairs for the Texas Association of REALTORS®.

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