The Third Party Financing Addendum on a Texas FSBO: What Sellers Must Verify Before Going Under Contract

If your FSBO buyer is getting a mortgage, the Third Party Financing Addendum (TREC 40-11) is attached to the One to Four Family Residential Contract and it governs the single most common reason Texas deals fall apart: the buyer can't close the loan. As the seller, you need to understand it before you sign, not after the option period ends and your house has been off the market for three weeks.

The short version: TREC 40-11 gives the buyer two separate contingencies — Buyer Approval and Property Approval — and each one has its own escape hatch and its own effect on earnest money. If you don't set the Buyer Approval deadline tight and verify what's behind the pre-approval letter, you're giving a stranger a free option on your home.

What TREC 40-11 actually does

The addendum does two things. It identifies the loan the buyer intends to get (conventional, FHA-insured, VA, USDA, reverse mortgage, or other), and it carves out two financing contingencies that let the buyer terminate and recover earnest money under specific conditions.

Without this addendum, a contract is effectively cash. With it, the buyer gets protection — and you take on the risk that the loan doesn't come together. That tradeoff is normal and necessary, but the terms you negotiate inside the addendum decide how much risk you're actually carrying.

Buyer Approval vs Property Approval — the two deadlines

These are not the same thing and they do not expire at the same time. This is the single biggest misunderstanding sellers have when they read the form for the first time.

Buyer Approval

Paragraph 2A covers Buyer Approval — the underwriting of the buyer themselves (income, assets, credit, debt-to-income). You fill in a number of days. If the buyer does not deliver written notice of termination for failure of Buyer Approval by that deadline, the Buyer Approval contingency is waived. After the deadline passes, the buyer can no longer walk based on their own loan qualification and keep earnest money.

Typical ranges in Bexar County FSBO deals run 15 to 21 days. Shorter is better for you as the seller. If the buyer wants 30 days, ask what the lender is still waiting on — a real pre-approval doesn't need a month to firm up.

Property Approval

Paragraph 2B covers Property Approval — appraisal, lender-required repairs, and anything the lender needs about the house itself. Here's the trap: Property Approval does not have a date you fill in. It continues through closing. If the appraisal comes in low, or the lender flags peeling paint on an FHA deal, or an underwriter kills the loan at the finish line based on the property, the buyer can still terminate and recover earnest money. That's true even if Buyer Approval is already waived.

You cannot shorten Property Approval. You can only manage the risk by reading the lender letter carefully and understanding the loan type.

Reading a pre-approval letter that actually means something

Any buyer can hand you a letter on letterhead. Most are useless. A pre-approval letter you can rely on will say, at minimum:

• The lender's name, NMLS number, and loan officer contact
• Loan type (conventional, FHA, VA, USDA)
• Loan amount approved and the sales price it supports
• Down payment amount and source (gift funds vs seasoned savings matters)
• Whether credit, income, and assets have been verified — not just "stated"
• Any outstanding conditions (sale of current home, employment start date, etc.)

If the letter says "based on information provided by the applicant" with no verification, it's a prequalification, not a pre-approval. Call the loan officer. A legitimate LO will confirm — in general terms, without violating privacy — whether the file has been through underwriting review. If the LO is a cell number with no NMLS and no company email, that's your signal to ask for a second opinion letter from a local lender before signing.

Loan type changes everything

The checkbox at the top of 40-11 isn't cosmetic. It affects your appraisal risk, your repair exposure, and your timeline.

Loan type	Appraisal risk	Property conditions	Typical close time
Conventional	Standard; appraisal gap addendum optional	Minimal	25–35 days
FHA	Appraisal sticks to the property for 120 days	Peeling paint, handrails, GFCI, roof life	30–40 days
VA	Tidewater process if value is light	Termite report required; wood rot, safety items	30–45 days
USDA	Rural eligibility by address	Similar to FHA	35–50 days

FHA and VA appraisers are stricter about the condition of the house. If your 1970s Converse ranch has a cracked driveway, a water heater without a drip pan, or exposed wiring in the garage, an FHA appraiser is going to call it out and the lender will require repairs before closing. You can either fix them, renegotiate, or lose the deal.

The VA tidewater process is worth knowing: if a VA appraiser thinks value will come in below the contract price, they notify the lender before issuing the appraisal and request additional comps. You have about 48 hours to supply them through the buyer's agent or lender. A good set of comps at that stage can save the deal.

When you can terminate — and when the buyer walks with the earnest money

Paragraph 2A also lets the seller terminate if the buyer fails to deliver the Buyer Approval notice on time — but only in a specific way. The buyer must deliver either (1) credit approval or (2) a termination notice by the deadline. If they do neither, you can terminate and the earnest money is released to you under Paragraph 4.

The practical move: on the morning after the Buyer Approval deadline, if you have not received a credit approval notice or anything else from the buyer, send a written termination notice through the title company (Independence Title, Alamo Title, Stewart, Texas National — whoever is holding escrow) and request release of earnest money. If the buyer is still working toward credit approval and wants to proceed, they will respond immediately with the approval notice, and you decide whether to accept it late or hold the line.

If you terminate for Buyer Approval failure and the buyer disputes the earnest money, the dispute moves through the title company's release process, and if unresolved, the losing party can be liable under Paragraph 18 of TREC 20-17 for three times the earnest money plus attorney's fees. Most buyers release rather than fight when the facts are clean.

What most people get wrong

• Treating the pre-approval letter as proof of funds. It isn't. It's one lender's opinion based on what the buyer told them. Call the LO before you sign.
• Setting Buyer Approval at 30 days to "be nice." You just gave the buyer a 30-day free option on top of the option period. 15–21 days is normal for a buyer whose file is already partly underwritten.
• Thinking Property Approval expires with Buyer Approval. It doesn't. A low appraisal in week five can still kill the deal and return the earnest money. The only way to override that is a separate Appraisal Addendum (TREC 49-0) where the buyer agrees to cover a specific gap.
• Letting the buyer change loan types mid-deal without an amendment. A switch from conventional to FHA brings new property conditions and a new appraisal risk. Require TREC 39-9 (Amendment) and a fresh pre-approval before you agree.
• Not naming the lender in the addendum. Paragraph 2A lets the buyer get the loan from "any lender." If the buyer is working with a specific LO you've vetted, consider adding language in Paragraph 5 (Other) that identifies that lender and requires written consent to switch. Lender-shopping mid-contract is a common delay tactic.
• Ignoring the FHA 120-day appraisal rule. If an FHA appraisal comes in low and the deal dies, that value sticks to your property for 120 days for any other FHA buyer. Pricing matters more when you're taking an FHA offer than when you're taking cash.

Before you sign

Run the pre-approval letter past a licensed Texas loan officer you trust — a 10-minute call is free and will tell you whether the file is real. If you're not sure what to ask, that's a legitimate reason to loop in a Texas real estate attorney for a flat-fee contract review before you execute, especially on a deal above $300,000.

RentInSA keeps FSBO sellers in control without pretending the paperwork is simple. You can list your home free at /list-your-home, pull local comps from active listings at /rentals and sold data through BCAD, and if a specific deal gets complicated, find a Bexar County agent or attorney at /agents to review the financing addendum before it costs you a month off market.