Switching Financing Sources Mid-Contract

If the buyer does not obtain financing as outlined in the Third Party Financing Addendum, is the buyer in default?

By Traci Jackson

March 01, 2020

The Third Party Financing Addendum is available to buyers who would like to make the contract contingent on qualifying for and being approved for the financing they specify in the addendum. If a buyer is unable to secure the financing selected in the form, the buyer has the right to terminate the contract (if applicable requirements to terminate are met).

Except for FHA or VA loans, Paragraph 2 of the Third Party Financing Addendum outlines two sets of circumstances under which the buyer may terminate:

1. The buyer does not obtain approval from the lender within a certain number of days. Buyer approval is deemed obtained when the terms of the loan(s) described in Paragraph 1 are available and the lender determines that the buyer has satisfied all of the lender’s requirements related to the buyer’s assets, income, and credit history. If either of these items is not satisfied, the buyer does not have buyer approval and may terminate the contract. Note that the buyer must give written notice of termination to the seller within the number of days agreed to in Paragraph 2A.

2. The lender determines the property does not meet the lender’s underwriting requirements. In that case, the buyer must provide a written statement from the lender stating the reasons the property does not meet underwriting requirements. This written statement and a notice of termination must be provided no later than three days before closing.
(If the buyer selected that the loan would be a VA or FHA loan, then the buyer would have to meet the requirements of Paragraph 4 in order to terminate.)

A question sometimes arises about whether a buyer is in default if the buyer is unable to secure the financing agreed to in the Third Party Financing Addendum and then wants to pursue some other type of financing. For example, what if the buyer cannot secure a conventional loan and wants to move to an FHA loan? Would this constitute a default under the purchase contract? The answer is no.

The purpose of the Third Party Financing Addendum is to make the contract contingent on securing the type of financing outlined in the addendum. Using the example above, if the buyer is unable to secure the conventional financing, the buyer can terminate the agreement, provided the applicable requirements of Paragraph 2 are met. However, if the buyer does not want to terminate and tries to obtain an FHA loan, the contract would no longer be contingent on securing the financing as stated in the Third Party Financing Addendum.

If the buyer is unable to obtain the FHA financing and cannot otherwise produce the funds to close pursuant to Paragraph 9 of the One to Four Family Residential Contract (Resale), the seller—as the non-defaulting party—would have the right to exercise the remedies available in Paragraph 15 of the contract.

Traci Jackson is a staff attorney for Texas REALTORS®.

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