When the buyer's financing falls apart
A buyer's financing exit does not close when the option period ends. Under the Third Party Financing Addendum it runs until three days before closing and covers the appraisal, whether the house can be insured, and lender required repairs. Terminating requires notice plus a written statement from the lender.
This explains how home selling works in Texas. It is not legal advice and it is not tax advice. Kyle is a Realtor. For advice about your own situation, talk to an attorney or a tax professional.
Most sellers believe that once the option period ends, the buyer is committed. That is the single most common wrong belief in a residential transaction, and it comes from nobody ever reading the financing addendum.
Two approvals, not one
If the Third Party Financing Addendum is attached, and it usually is, the buyer’s financing is only approved when both of these clear.
Buyer approval is about the person. Their assets, their income, their credit history. The addendum says it is obtained when the loan terms are available and the lender has determined the buyer satisfies the lender’s requirements on those three things.
Property approval is about the house.
Buyer's clock
Buyer approval deadline
A negotiated number of days after the Effective Date
After this passes, the contract is no longer subject to buyer approval. This one you can actually watch close.
Buyer's clock
Property approval, the buyer's financing exit
3 days before the Closing Date
Terminating requires notice AND a written statement from the lender giving the reasons. Earnest money is refunded to the buyer. This one stays open almost the whole way.
The addendum also says time is of the essence for that paragraph and strict compliance is required. Those dates are real in both directions.
Insurability is the one nobody sees coming
Everybody expects the appraisal. Fewer people think about insurance.
A lender will not close a loan on a house that cannot be insured. If the buyer’s carrier declines because of the roof’s age, a prior claim history on the property, or something else in the report, that is a property approval failure just as much as a low appraisal is.
This is a live issue in Texas right now, and it is one reason the seller’s disclosure notice asks whether the property is presently covered by insurance and whether you have ever been unable to insure it. If there is a story on your house, it is far better told on the disclosure up front than discovered by an underwriter in the last week. The seller’s disclosure page covers that form.
Lender required repairs
The third piece of property approval is repairs the lender insists on before it will fund.
That is worth sitting with. On a $500,000 house, five percent is $25,000. Below that number, if you are willing to pay, the buyer cannot use the repairs alone as an exit. Above it, they can.
What you can actually do
Ask for status, in specifics. The financing addendum authorizes the lender to tell you where approval stands. It also authorizes the lender, title company and escrow agent to give closing disclosures and settlement statements to both sides’ brokers. Use that. “Everything’s on track” is not information. Ask whether the appraisal is back, whether the file is out of underwriting, and what conditions are still outstanding.
Watch the buyer approval date go by. That one closes. When it passes without a termination, the contract is no longer subject to it, and your position improves.
Keep taking back-up offers. This costs you nothing and Paragraph 19 expressly allows it.
A back-up gets papered with TREC form 11-9. There is also a newer form, 62-0, that a seller uses to notify a back-up buyer when the first contract terminates and their contingency comes off.
When it actually dies
If this happens: the buyer terminates properly under the financing addendum
What is actually true
If they gave notice and a written statement from the lender within their deadline, this is simply the contract working as written. The earnest money goes back to them. You keep the option fee.
Your options
What I would do
Sign the release quickly. Paragraph 18D makes a party who wrongfully refuses to sign a release within 7 days of the request liable for damages, the earnest money itself, attorney's fees and all costs of suit. Fighting over earnest money you are not entitled to is an expensive way to be annoyed. And before you relist, find out what actually failed. If it was the appraisal or insurability, the next buyer may hit the same wall, and you would rather know now.
If this happens: the buyer misses their deadline and then cannot close
What is actually true
This is different from a proper termination, and it is where the earnest money is genuinely in play. If property approval was deemed obtained because they did not terminate in time, and then they fail to close, Paragraph 15 gives you real remedies.
Your options
What I would do
Get an attorney involved before you take a position in writing. This is the one scenario on this page where the difference between 'terminated properly' and 'defaulted' is worth real money, and it turns on documents and dates rather than on who feels wronged. TREC publishes form 50-0, the Notice of Seller's Termination of Contract, for the situations where you are the one ending it.
If this happens: the lender needs two more weeks
What is actually true
Extremely common and usually not fatal. Underwriting queues, an appraisal that came in late, a document the buyer had to chase down. None of that means the loan is dead.
Your options
What I would do
If you extend, paper it before the original closing date passes. Letting the date slip without an amendment muddies who is in default, and that ambiguity helps nobody. Also ask what specifically is outstanding. Two days for a missing pay stub is a very different risk than two weeks for an underwriting condition nobody has solved yet.
The earnest money question
However this ends, the title company cannot simply hand the money to whoever asks. They need a release signed by both sides, or a court order.
If someone will not sign, Paragraph 18C sets out the demand process. A written demand goes to the escrow agent, and if no written objection arrives within 15 days, they may disburse to the party who made the demand, less any unpaid expenses.
And Paragraph 18D is the one that cools people down. A party who wrongfully fails or refuses to sign a release within 7 days of receiving the request is liable for damages, the earnest money, reasonable attorney’s fees, and all costs of suit.
That cuts both ways. Before you dig in on a few thousand dollars, look at the number honestly and ask whether it is worth the next four months of your life.
The short version
The buyer’s financing exit is wider and later than almost any seller expects. It covers the appraisal, insurability and lender repairs, and it runs to three days before closing.
You cannot close that window. What you can do is watch it. Ask for real status from the lender, note when the buyer approval date passes, keep taking back-up offers the whole time, and paper any extension before the date rather than after.
The main guide puts this in the larger picture, which is that your obligations lock in on day one while theirs unwind slowly.
Frequently asked questions
Yes, if the Third Party Financing Addendum is attached. There are two separate outs. Buyer approval, which is about their credit, income and assets, and property approval, which is about the house. Property approval runs until the third day before the closing date.
Usually not. If they terminate properly within their financing deadlines, with notice and a written statement from the lender, the earnest money is refunded to them. You keep the option fee either way. If they miss the deadline and then simply fail to close, that is a different situation.
The addendum says it includes but is not limited to the appraisal, insurability, and lender required repairs. So a house that cannot be insured, or that the lender wants work done on, can fail property approval even if the appraisal was fine.
Yes. Paragraph 19 of the TREC contract says that unless expressly prohibited by written agreement, the seller may continue to show the property and receive, negotiate and accept back-up offers. TREC form 11-9 is the back-up addendum.
If they fail to close by the closing date and they are in default, Paragraph 15 lets you enforce specific performance, seek other relief, or terminate and receive the earnest money as liquidated damages. Getting the earnest money released still requires a signed release or a court order.
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Sources
Questions about your own sale?
Every house is different. If you want this applied to yours, reach out and I will walk you through it.
Contact Kyle