Practically Speaking

Q. Can a license holder use TREC Form 49-1 Addendum Concerning Right to Terminate Due to Lender’s Appraisal for a

Federal Housing Administration (FHA) or Veterans Administration (VA) loan buyer? A. No. TREC Form 49-1 specifically notes under the title that it cannot be used for “FHA-insured or VA-guaranteed financing,” because federal law dictates how and when an FHA or VA buyer can terminate due to a low appraisal. A license holder should never use the Appraisal Addendum for a VA or FHA or for any reason write an appraisal contingency into Paragraph 11 of the contract. This would be considered the unauthorized practice of law. Q. Can a party to the contract use TREC Form 49-1 Addendum Concerning Right to Terminate Due to Lender’s

Appraisal or use language supplied by the lender for an FHA or VA loan buyer? A. No. Since TREC Form 49-1 specifically notes under the title that it cannot be used for “FHA-insured or VA-guaranteed financing,” any party who signs the form is affirming that those types of loans are not involved. Further, even if the parties wrote some language in Paragraph 11 waiving the appraisal contingency, it would not be effective.

What the Law Says

Pursuant to federal regulations and underwriting guidelines put in place for FHA and VA loans in 1978, a form containing a prescribed clause (known as the Amendatory Clause) must be given to an FHA or VA purchaser or included in the sales contract when the purchaser has not been informed of the appraised value before signing the sales contract. In Texas, the Amendatory Clause language is contained in the body of Paragraph 4 of the Third Party Financing Addendum and provides, “It is expressly agreed that, notwithstanding any other provision of this contract,

Maria Delgado, a decorated veteran helicopter pilot, wants to purchase a home using her VA eligibility. She found an online lender who has told her she can get her approved for VA financing in just a few days. The market is driving prices up at a rapid pace. Maria wants to guarantee she can get a particular home her agent showed her. The agent knows Maria will have to offer more than what the seller is asking to get this property under contract, and the house may appraise for less than that

Keep in mind an agent is a fiduciary. Be aware of the protections federal law has given to FHA and VA buyers regarding low appraisals. Help your buyers and sellers understand these protections exist for good reasons. Do not use TREC Form 49-1 for an FHA or VA buyer. If language is added waiving the appraisal contingency, the listing agent should point out to the seller that it conflicts with Paragraph 4 of the Third

Q. What amount is put in the blank in Paragraph 4 of the Third Party Financing Addendum regarding the appraised value for an FHA or VA loan? the purchaser (Buyer) shall not be obligated . . . ” to complete the purchase or forfeit earnest money if the appraised value is below the amount assessed by FHA or VA for the value of the home (emphasis added). The “notwithstanding” language makes clear that the purchaser cannot waive the appraisal contingency even if other provisions of the contract attempt to waive it. However, an FHA or VA buyer can elect to pay more than the appraised value after the appraised value is known in accordance with federal guidelines as set out in subsections A-C of Paragraph 4.

Party Financing Addendum, and the seller should consult an attorney regarding the enforceability of the waiver language. Remind clients an FHA or VA buyer can still elect to put in more money if needed after the appraisal is received, or the sales price can be renegotiated after the appraisal is received, if the parties want to proceed to closing.

A. Generally, the sales price goes in this blank. Keep in mind that many FHA or VA loans require no money down, so the purchaser wants the property to appraise for the full sales price.

For Example

sales price. The online lender recommends language to Maria for the contract that waives any right Maria has to back out of the contract if the property does not appraise. The agent for Maria points out the language in Paragraph 4 of the Third Party Financing Addendum, which conflicts with the recommendation of the online lender, and recommends Maria consult an attorney regarding the validity of the lender’s recommended language.

Best Practice

Bonus Question

Nothing in this publication should be construed as legal advice for a particular situation. For specific advice, consult an attorney. Lewis (kerri@2oldchicks.com) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission (TREC). Wukasch (avis@2oldchicks.com) is a broker and former TREC chair.