Third (3rd) Party Financing Addendum

When buying a home and applying for a mortgage, you will need to sign a Third Party Financing Addendum as part of the process. Third-Party Financing refers to any credit or loan agreement obtained from someone other than the main or parent contributors. For example, when buying a home, you may use a lender or other source to finance the payment required to buy the home.

A Third-Party Financing Addendum is a document that is attached to the original sales contract. It outlines the terms of a mortgage loan that the buyer agrees upon in order to purchase a property. The sales contract would normally be contingent upon a buyer obtaining a mortgage loan, as outlined in the addendum. If a buyer does not meet the terms in the addendum and does not get the mortgage loan, the sales contract becomes void.

There are several types of Third Party Financing Addendums that can be used:

  • Seller Financing Addendum – this is used when the buyer is obtaining a loan from the seller of the property.
  • Conventional Financing Addendum – this is used for a buyer to outline the funds needed for closing and is given by the Association of Realtors.
  • FHA / VA Financing Addendum – this is used when financing is coming from a VA or FHA loan.
  • Reverse Mortgage Financing Addendum – this is used for people 62 years old or over and lets the seller of the property obtain funds in exchange for the homes’ equity.
  • USDA Financing Addendum – this is used when buying a property in suburban and rural areas and who aren’t able to qualify from a traditional loan.

You can download one of our free templates or samples to get a better understanding of what a Third Party Financing Addendum should look like.

What is Included?

Each addendum will vary depending on the terms and type of financing. However, there are key elements that should be in the addendum.

Heading: The first part of the addendum is used to record the date of the original contract that the addendum has been created for and to introduce all parties involved. The full legal names of both the buyer and seller will be needed, as well as the full address of the property that is being sold.

Financing Type: Your next section should outline the type of financing being used. There are three types of financing:

  • Conventional financing, which would be a traditional mortgage. You will need to know details, such as the lifespan of the mortgage, the interest rate, origination charges, and the principal amount.
  • USDA Financing, which requires details, such as the minimum monthly rates o amortization, the length of the mortgage term, the maximum rate of interest, and the minimum amount that has been guaranteed.
  • Reverse Mortgage Financing, which requires the interest rate, mortgage term, and the original amount of the mortgage.
  • FHA Financing, which requires the minimum account guaranteed, the monthly repayments, and the maximum rate of interest.
  • VA Financing, which requires details of the monthly amortization, loan term, interest rate, and the minimum amount that is guaranteed.

Lender and Property Approval: In some instances, the approval of the lender will be required to gain financing. If the approval of the lender is required, you would need to give the date that this approval is needed. You will also need to give the date that the buyer must provide approval of the property, which is given by the lender.

Execution of Addendum: The addendum needs the signatures of both the buyer and the seller, along with their full names and the date that the addendum is being signed.

How the Third Party Financing Addendum Works

The purpose of this addendum is to give a buyer the ability to terminate a sales contract if they are unable to obtain loan approval, or if there are issues after a home inspection, provided they have given written notice to the seller in the outlined time period in the addendum. This will allow the buyer to have any earnest money refunded back to them. However, if the buyer has not given timely notice, they may then be in breach of the sales contract. In most states, the buyer needs to give notice at least 3 days before closing.

Note: The addendum doesn’t require a buyer to obtain funding in the timeframe given. It just gives the buyer the ability to opt-out of the sales contract if they feel approval for funding will not be given.

Regardless of the time frame given for financial approval, the home being sold needs to meet the requirements of the underwriter of the lender. Should the property not be appraised for the original purchase price, the buyer can either terminate the sales contract or proceed with it.

Free Templates

Third 3rd Party Financing Addendum Template
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    Frequently Asked Questions

    What does buyer approval mean?

    This refers to any approval that is needed for the buyer to obtain funding so that they can close on the sale of a home. This can be government or lender approval.

    Who is responsible for letting the seller know that a buyer has not gained approval for financing?

    Yes, the buyer or the agent will need to provide written details regarding why that appraisal did not meet the requirements for financing.

    What does property approval mean?

    Part of the contingencies of the third party financing addendum requires that the property being sold must meet the approval of the lender’s underwriters, which is done via a home appraisal.