5.3 Financing Addenda & Critical Promulgated Addenda

5.3 Financing Addenda & Critical Promulgated Addenda

Exam Focus: Promulgated contract addenda modify and control the core terms of TREC sales contracts. On the Texas Broker Licensing Examination, questions rigorously test the operational mechanics of the Third Party Financing Addendum (Form 40-11) — particularly the sharp distinction between Buyer Approval deadlines and Property Approval underwriting — alongside Seller Financing (Form 26-8), Mandatory HOA Addendum (Form 36-11) termination windows, Back-Up Contracts (Form 11-7) fee delivery timelines, and the 72-hour kick-out clause in the Sale of Other Property Addendum (Form 10-6).

1. Third Party Financing Addendum (TREC Form 40-11)

The Third Party Financing Addendum (TREC Form 40-11) is attached whenever any portion of the Sales Price in Paragraph 3B involves commercial third-party borrowing. It establishes a critical legal bifurcation between Buyer Approval and Property Approval.

Buyer Approval vs. Property Approval

┌─────────────────────────────────────────────────────────────────────────────┐
│                     THIRD PARTY FINANCING APPROVAL PATHWAYS                 │
├──────────────────────────────────────┬──────────────────────────────────────┤
│            BUYER APPROVAL            │           PROPERTY APPROVAL          │
│         (Paragraph 2A / 2B)          │             (Paragraph 2B)           │
├──────────────────────────────────────┼──────────────────────────────────────┤
│ • Evaluates borrower's credit,       │ • Evaluates the physical collateral: │
│   income, assets, and DTI ratios.    │   appraisal, condition, insurability.│
│ • Must give written notice of term.  │ • Does NOT expire with Buyer         │
│   within negotiated # of days.       │   Approval deadline.                 │
│ • If Buyer fails to notify Seller    │ • Can terminate up to 3 days before  │
│   in time, contract is NO LONGER     │   closing if property fails lender   │
│   subject to Buyer Approval.         │   underwriting requirements.         │
│ • Earnest money refunded if timely.  │ • Earnest money refunded to Buyer.   │
└──────────────────────────────────────┴──────────────────────────────────────┘

• Buyer Approval (Time-Sensitive Contingency):
  • Governs whether the buyer satisfies the lender's financial underwriting requirements (credit score, employment verification, debt-to-income ratios, cash reserves).
  • The addendum specifies a negotiated number of days (e.g., 21 days) for Buyer Approval.
  • Notice of Termination: If Buyer cannot obtain Buyer Approval, Buyer must deliver written notice of termination to Seller within the agreed timeframe along with a copy of a written lender rejection letter. Buyer receives a full refund of earnest money.
  • The Strict Waiver Rule: If Buyer fails to deliver written notice of termination to Seller within the specified days, the contract is no longer subject to Buyer Approval. If Buyer later fails to close due to loan denial, Buyer is in default under Paragraph 15 and forfeits the earnest money.
• Property Approval (Collateral Contingency):
  • Governs whether the property satisfies the lender's underwriting standards (sufficient appraised value, physical structural condition, roof certification, environmental insurability, and required repairs).
  • Timeline: Property Approval is not subject to the Buyer Approval day-limit! Property Approval continues until the lender issues final loan documents (up to 3 days prior to the Closing Date).
  • If the lender determines the property does not satisfy Property Approval (e.g., low appraisal or uninsurable roof), Buyer may terminate prior to closing and receive a full refund of earnest money.

Loan Types & Statutory Mandatory Clauses

• Conventional Financing: Fixed-rate or adjustable-rate conventional first or second mortgages.
• Texas Veterans Land Board (VLB): Low-interest loans for qualified Texas military veterans.
• FHA Insured Financing (HUD/FHA Amendatory Clause): Under federal regulations (24 CFR § 203.257), the addendum contains the mandatory FHA Amendatory Clause: "It is expressly agreed that notwithstanding any other provisions of this contract, the purchaser shall not be obligated to complete the purchase of the property... or to incur any penalty by forfeiture of earnest money deposits... if the sales price exceeds the appraised value determined by the FHA." A buyer cannot waive this statutory protection.
• VA Guaranteed Financing (Notice of Value / CRV): Contains the mandatory VA Notice of Value Clause. If the purchase price exceeds the VA reasonable value appraisal, the veteran buyer cannot be forced to buy or forfeit earnest money, but may voluntarily elect to proceed by paying the cash difference at closing.
• USDA Guaranteed Financing: Rural housing development loans.
• Reverse Mortgage Financing: FHA Home Equity Conversion Mortgages (HECM) for borrowers age 62 and older.

2. Seller Financing (Form 26-8) & Loan Assumption (Form 41-3)

Seller Financing Addendum (TREC Form 26-8)

When the Seller agrees to carry back a promissory note for all or part of the purchase price, the parties must attach TREC Form 26-8.

• Credit Information Delivery: Buyer must deliver credit reports, employment verifications, and financial statements to Seller within a negotiated number of days (default: 5 days) after the effective date.
• Seller's Review & Termination Right: Seller has 7 days after receiving the credit information (or 7 days after the deadline if not delivered) to review the creditworthiness of Buyer. If Seller determines Buyer's credit is unacceptable, Seller may terminate the contract and Buyer receives a full refund of earnest money.
• Promissory Note & Security Instruments:
  • Specifies principal amount, interest rate, payment frequency, and maturity date.
  • Late Charge: Typically 5% of the monthly installment if payment is not received within 10 days of due date.
  • Security: Promissory Note is secured by a Vendor's Lien in the deed and a Deed of Trust creating a private power of sale (foreclosure) in favor of a designated Trustee.
• Tax and Insurance Escrow: Parties negotiate whether Buyer pays monthly 1/12th escrow for property taxes and hazard insurance, or delivers annual paid receipts.
• Legal Usury Limits & Dodd-Frank / SAFE Act Compliance:
  • Texas Usury Cap: Interest rates cannot exceed legal ceilings under Texas Finance Code Chapter 303.
  • Federal SAFE Act & Dodd-Frank: Texas sellers financing residential properties must qualify under the Dodd-Frank seller-financing exclusion (e.g., financing no more than 3 properties in a 12-month period, fully amortizing, fixed or standard adjustable rate) or utilize a licensed Residential Mortgage Loan Originator (RMLO).

Loan Assumption Addendum (TREC Form 41-3)

• Assumption Approval: Buyer agrees to assume Seller's existing mortgage. Buyer must submit credit applications and payment of assumption fees within negotiated days.
• Release of Seller Liability (TREC Form 12-3): An assumption does not automatically release the seller from liability on the original promissory note. The addendum establishes whether the transaction is contingent on the lender executing a formal written Release of Liability releasing the Seller from future deficiency liability.
• Restoration of VA Entitlement: If assuming a VA-guaranteed loan, the addendum specifies whether the buyer must be a qualified veteran who agrees to substitute their VA entitlement to restore the seller's VA loan benefits.

3. Mandatory HOA Addendum (Form 36-11) & Property Owners Associations

Under Texas Property Code Chapter 207, purchasers of property subject to mandatory membership in a Property Owners Association (POA/HOA) are entitled to receive subdivision information and resale certificates.

Addendum for Property Subject to Mandatory Membership in a Property Owners Association (Form 36-11)

• Subdivision Information: Defined as a current copy of the restrictive covenants, HOA bylaws, rules, and a formal Resale Certificate (financial status of HOA, reserve funds, special assessments, pending lawsuits, and violation notices).
• Delivery Options & Timeline:
  • Option A: Seller delivers Subdivision Information within negotiated days.
  • Option B: Buyer obtains Subdivision Information at negotiated expense.
  • Option C: Buyer has already received the information prior to signing.
  • Option D: Subdivision Information is not required.
• Statutory 3-Day & Pre-Closing Termination Windows:
  • 3-Day Termination Right: If Buyer receives the Subdivision Information, Buyer has 3 calendar days after receipt to terminate the contract for any reason and receive earnest money back.
  • Pre-Closing Termination Right: If Buyer timely requested the Subdivision Information under Option A or B but does not receive it, Buyer may terminate the contract at any time prior to closing and receive a full refund of earnest money.
• Transfer Fees & Expense Allocations: The addendum explicitly establishes a dollar cap on what Buyer pays toward HOA transfer fees, ownership change fees, and resale certificate costs. Any excess fees above the agreed cap must be paid by Seller.

4. Back-Up Contracts (Form 11-7) & Sale of Other Property (Form 10-6)

Addendum for "Back-Up" Contract (TREC Form 11-7)

The Back-Up Addendum attaches to an offer that is secondary to an already existing, fully executed primary sales contract.

┌─────────────────────────────────────────────────────────────────────────────┐
│                     BACK-UP CONTRACT CRITICAL PROCEDURES                    │
├──────────────────────────┬──────────────────────────────────────────────────┤
│ Execution Date           │ Contract is fully signed and binding.            │
│ 3 Days After Execution   │ Deliver Earnest Money & Option Fee to Escrow!    │
│ Option Period Begins     │ Termination option runs from execution date!     │
│ Modified Effective Date  │ Seller gives written notice primary is dead.     │
│ Automatic Termination    │ If primary does not terminate by specified date. │
└──────────────────────────┴──────────────────────────────────────────────────┘

• Immediate Deposit Requirement (Exam Trap!): The Back-Up Buyer must deliver the earnest money and option fee to the escrow agent within 3 days after the execution date of the Back-Up contract, exactly like a primary contract! The buyer does not wait for the primary contract to terminate before delivering funds.
• Termination Option Window: The Back-Up Buyer's unrestricted right to terminate under Paragraph 5 begins on the execution date of the Back-Up contract and extends through the negotiated number of days after the Modified Effective Date.
• The Modified Effective Date: The date the Seller delivers written notice to the Back-Up Buyer (along with proof of primary contract termination) stating that the primary contract has terminated.
• Automatic Expiration: If the primary contract does not terminate on or before the specific calendar date written in the addendum, the Back-Up contract automatically terminates, and the earnest money is refunded to the Back-Up Buyer.

Addendum for Sale of Other Property by Buyer (TREC Form 10-6)

• Contingency Clause: The contract is contingent upon Buyer closing the sale of their existing property located at a specified address on or before a designated date.
• Seller's Continuing Right to Market: Seller continues to market the property and may solicit and accept back-up offers.
• The 72-Hour Kick-Out Clause:
  1. If Seller receives an acceptable back-up offer, Seller provides written notice to the primary Buyer.
  2. The primary Buyer has a negotiated number of hours (typically 72 hours) after receiving notice to:
     • Waive the contingency in writing AND deposit an agreed amount of additional earnest money with the escrow agent; OR
     • Allow the contract to terminate automatically, whereupon the primary Buyer receives a full refund of earnest money, and Seller proceeds with the back-up buyer.

5. Summary Table: Promulgated Financing & Contingency Addenda