Two Approvals for Your Buyer to Obtain Financing

According to the TREC Third Party Financing Addendum, the buyer and the property must be approved to obtain financing. If either one doesn’t meet the lender’s underwriting requirements, the buyer’s earnest money will be refunded. But depending on which requirements aren’t met, certain steps must be completed before that refund can happen.

First the buyer must obtain lender’s approval, if not waived (per paragraph 2.A). The buyer must make an application with a lender and then meet the lender’s requirements for credit history, income, and assets (per Paragraph 1). This review is more rigorous than the initial review for issuance of an approval or qualification letter by a mortgage loan officer. In this step, the lender’s underwriter reviews the required documents and approves the buyer. If the buyer cannot obtain approval, they can give notice of termination and their earnest money will be refunded if they do so within the time period specified in Paragraph 2.A.

Second, the buyer must obtain lender’s underwriting approval of the property (per paragraph 2.B). There are any number of reasons why a property may not be approved; the paragraph states, “not limited to appraisal, insurability, and lender-required repairs”. Perhaps the appraisal didn’t rise to the value required by the contract sale price, the roof is so old the property is uninsurable, or the foundation requires repair. These are the most common reasons, but it can be anything deemed unacceptable by the lender. If the lender says the property cannot be approved, the buyer can submit a notice of termination to the seller (with a statement from the lender stating why the property couldn’t be approved) and their earnest money will be refunded. These documents must be provided to the seller at least three days before closing for the earnest money to be refunded.

Often there is little to be done to salvage a transaction when a buyer is not approved.  But if the property doesn’t receive approval, the transaction can be salvaged if the parties agree to additional terms.

A Third Party Financing Addendum doesn’t obligate the seller to take any action, and only offers the buyer the option to terminate the contract. Most often, neither party wants to terminate the contract. Time and money invested in preparation for closing incentivizes both parties to find a win-win solution, so the parties begin negotiations to establish a path to satisfy the lender’s requirements. Then an amendment is added to the contract specifying the actions to be taken. Sometimes, a simple reduction in price can keep a closing on track. Repairs might require a contract extension and inspection by the lender before property approval is finalized.

If you’re not sure if something can or should be addressed, your first line of defense as an agent is to contact your broker with questions. For agents and brokers alike, the Texas REALTORS® Legal Hotline has staff attorneys dedicated to answering members’ legal questions as a REALTOR® benefit. The attorneys cannot give legal advice regarding specific transactions or factual situations, but members can receive information from a general perspective on regulations, contracts, agency, brokerage, closings, and more. Call 800-873-9155.

Author: Tod Franklin, DFWCityhomes