What is Third-Party Financing Addendum?

A third-party financing addendum is an additional contract that supplements the original sale contract. It is commonly used in real estate transactions.

The purpose of the third-party financing addendum is to provide the buyer with an option to terminate the sale contract if they cannot obtain lender financing due to the reasons mentioned in the document.

What is Third-Party Financing Addendum (TXR 1901, TREC 40-9)?

A third-party financing addendum is an official document added to the original contract made between two parties. 

An addendum can be made for any type of contract between two parties. A third-party financing addendum is created when the buyer obtains external financing from another party not originally involved in the main contract. 

Third-party financing addendum TXR 1901/TREC 40-9 are addendum documents promulgated by the Texas Real Estate Commission (TREC). 

TXR 1901 is the code for financing addendum and TREC 40-9 is the document identified for the TREC where the number 40-9 represents the version number of the same document. 

TREC 40-9 has replaced the old version of the same addendum 40-8 with a few minor updates. 

A third-party financing addendum is an additional contract that outlines the terms and conditions of financing arrangements for the mortgage or property purchase agreement. 

It outlines different situations and responsibilities of the buyer to fulfill the terms of the original sale contract by arranging third-party financing. 

The addendum becomes a contractually binding document when signed by both parties. The buyer then becomes liable to arrange the mortgage loan and fulfill the terms of the addendum. 

If the buyer fails to meet the terms of the addendum and does not notify the seller, the original sale contract also becomes void. 

Why Use a Third-Party Financing Addendum? 

Addendums are separate contracts that are attached to the original contract between two sides. Financing addenda are commonly used in the real estate sector for several purposes. 

A third-party financing addendum is used to bound the buyer to secure third-party financing or a mortgage loan to complete the original transaction. 

Similarly, both parties can create a different addendum for clarification, amendments, and addition/deletion of certain clauses in the original sale contract without changing the context of the contract. 

Common reasons for using addenda include: 

  • Adding or deleting a clause in the original contract – for example, arranging a mortgage loan by the buyer. 
  • Either the buyer or the seller requires a date extension in the original contract. 
  • One or both parties want to change certain terms of the original contract. 
  • One or both parties cannot oblige a certain clause in the contract. 
  • External factors affecting both parties that were not included in the original contract can be outlined in the addendum contact. 
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Please note that the addendum contract should not include terms and conditions that change the context and legal status of the original sale contract. 

Also, both parties should clarify the waivers or omissions are different from contract termination clauses for both sides. 

Texas Real Estate Commission 

The Texas Real Estate Commission (TREC) was founded in 1949 by Texas Legislature. It provides real estate valuation and transaction protection services. 

It has a subdivision Texas Appraiser Licensing and Certification Board (TALCB) as well. Both these bodies oversee different aspects of real estate transactions, including: 

  • Real estate brokerage 
  • Property Appraisals 
  • Right-of-Way Services 
  • Property Valuation 
  • Licensing and Contract Information 

Additionally, the commission offers a wide range of educational and information material for sellers and buyers of real property. 

The commission also offers guidelines, templates, and format guides on contracts and agreements used in the real estate industry pertaining to the Texas legislative requirements. 

Types of Third-Party Financing Addendums 

Both parties can agree upon using one of the several types of third-party financing addendums. 

Seller Financing Addendum 

This type of addendum is used when the seller of the property also provides financing to the buyer. 

The terms and conditions of the seller financing are created separately from the property sale transaction. An Addendum creates a separate obligation for the buyer for that loan. 

Conventional Financing Addendum 

It is used by the buyer to secure closing costs of the sale transaction through the first or second mortgage loans. 

Usually, the financing comes through traditional sources like a commercial bank. 

Reverse Mortgage Financing 

It is also known as the Home Equity Conversion Mortgage Loan and is offered to citizens 62 years or older age. Borrowers use the home equity to secure the mortgage loan. 

FHA/VA Financing 

This type of third-party financing addendum is used when the mortgage financing comes from the Federal Housing Authority (FHA) or the US Department of Veterans Affairs (VA). 

USDA Financing 

This addendum contract is used by both parties for real estate transactions in rural areas when the buyer cannot obtain traditional financing. 

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This type of financing comes from the US Department of Agriculture for farmers. 

How to Write Third-Party Financing Addendum? 

You can use a template provided by authentic sources like TREC or use the same format to write a new financing addendum as needed. 

You can follow these steps to write a customized financing addendum. 

Step 01: 

Write the addendum title and include information about the original mortgage contract. So that both parties know the addendum relates to an original contract. 

Step 02: 

Write the addendum clauses in detail by starting from the source of financing option used by the buyer. 

Step 03: 

Include specific clauses for loan approval, information releasing authorization and security amount for the loan. 

Step 04: 

Add signature lines for both parties. Also, add space for the date in front of the signature lines. 

Step 05: 

Add a document reference number to indicate the first version. Continue the sequence if there are changes to the first addendum draft. 

Follow these tips to write an effective copy of the addendum: 

  • Use the same document formatting as used in the original financing contract. 
  • Include both parties by name. 
  • Indicate the addendum writing, effective, and signature dates separately. 
  • Include a reference to the original mortgage contract as well. 

Parts of Third-Party Financing Addendum 

If you use a template provided by an authentic source like TREC, you must understand the format of the document you are going to sign. 

The addendum template authorized by TREC has the following main components. 

Title

The first part of the document is the title. It indicates the document is an addendum that relates to an original mortgage contract. 

Heading

The next part includes the legal names of both parties, the address of the property being sold, and a reference to the original contract. 

This section may also include the date of the original contract and the parties involved in that contract. 

Financing Type

The main part of an addendum contract is the type of financing being used by the buyer. The terms and conditions of the addendum will be dominated by the type of financing. 

Lender Approval

The buyer can use this section to include a lender approval date. It gives the buyer a probation period during which the addendum contract can be terminated. 

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The lender’s approval of the buyer may take more time but the buyer can include specific days. 

Property Approval

Most lenders require property appraisal before approving the mortgage loans. Both parties can use this section to include clauses related to the lender’s approval of property as well. 

Execution/Closing Part

The contract can only be enforced when signed by both parties. This section should include the signature and date lines for both parties. 

Frequently Asked Questions About Third-Party Financing Addendum 

Let us answer some frequently asked questions about third-party financing addendum contracts. 

What if the Purchase is Financed Partially by the Buyer? 

Both parties can use the same format of the addendum even when the sale is financed partially by the buyer. 

The clauses included in the original sale contract as well as in the addendum can clarify this point further. 

What Does the Buyer Approval Mean? 

The buyer approval means the lender’s approval of the creditworthiness of the borrower. When the buyer approaches a lender, the lender will usually perform a credit check and appraise the creditworthiness of the borrower.

What Does the Property Approval Mean? 

Lenders will also perform a property check for a mortgage loan. If the borrower fails to get a mortgage loan approval due to the lender’s disapproval of the property, the addendum contract can be terminated.

What Happens if the Buyer Cannot Obtain Third-Party Financing?

The buyer can terminate the contract by notifying the seller within the mentioned period if the lender does not approve the mortgage loan.

The main purpose of the third-party financing addendum is to protect the buyer in case the buyer fails to obtain financing.

How to Write Interest Rates in the Financing Addendum?

The buyer cannot include ambiguous terms like “market interest rate” as previously allowed. The buyer must specifically write a percentage term for the maximum interest rate for the mortgage loan.

Can the Buyer Terminate the Contract if Lender’s Underwriting Conditions are Not Met? 

Yes, the buyer can terminate the contract if the lender does not approve the mortgage loan when its underwriting conditions are not fulfilled.

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