The Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) require that buyers and sellers sign specific disclosure forms to protect buyers who utilize FHA or VA financing. More specifically, the FHA requires use of the Amendatory Clause and the VA requires use of the Escape Clause.
Although the entities title the disclosure forms differently, the verbiage is virtually the same and therefore one may see the form titled “Amendatory/Escape Clause” or something similar. The disclosure verbiage resembles the following:
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 described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise unless the purchaser has been given in accordance with HUD/FHA or VA requirements a written statement by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement lender setting forth the appraised value of the property of not less than $_________. The purchaser shall have the privilege and option of proceeding with consummation of the contract without regard to the amount of the appraised valuation. The appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure. HUD does not warrant the value or the condition of the property. The purchaser should satisfy himself/herself that the price and condition of the property are acceptable.
The reason the FHA and VA require the Amendatory/Escape Clause is to protect the buyer against a low appraisal. In other words, if the appraised value is lower than the agreed upon purchase price, the seller cannot require the buyer to purchase the home. Furthermore, if the appraised value is low and the buyer thereafter cancels the purchase contract, the buyer will be awarded their earnest money deposit, if any. Of course, this does not preclude the parties from renegotiating the purchase price or having the buyer pay out-of-pocket the difference between the appraised value and purchase price.
Although REALTORS® are not lenders, these types of loans require REALTORS® to understand certain requirements within the loan program so that the REALTOR® may effectively protect their client.
In a competitive market, there may be instances in which the FHA or VA buyer decides to make their purchase offer stronger by choosing to:
- Waive the appraisal contingency;
- Agree to deposit non-fundable earnest money with the offer; or
- Allow the earnest money deposit to become non-refundable before the appraisal is returned.
Typically, the above provisions provide the seller with additional reassurances because the seller will not have to worry about whether the home will appraise and the seller will be able to keep the earnest money deposit if the appraised value is less than the purchase price and the transaction is thereafter cancelled. However, because the Amendatory/Escape Clause provides extra protection to the FHA and VA buyer, if the property does not appraise, the FHA or VA buyer is allowed to cancel the transaction and receive a refund of their earnest money deposit regardless if the buyer agreed to any of the above terms. In other words, even if an FHA or VA buyer included any of the above terms in their contract, if the property does not appraise for the agreed upon purchase price, the buyer may cancel the contract and receive a refund of their earnest money deposit.
Unfortunately, many sellers and listing agents misunderstand this process and believe that when a buyer waives the appraisal contingency in conjunction with an FHA or VA Loan, the seller will receive the earnest money deposit should the buyer choose to cancel if the home fails to appraise. This is not the case and, regardless of the appraisal contingency waiver in the purchase contract, the earnest money will be returned to the buyer.
FHA and VA loans are government insured loans. This means that if the borrower defaults on the loan, the lender is guaranteed reimbursement. However, for the lender’s loan to be guaranteed, the lenders’ guidelines provide that the lender must ensure the Amendatory/Escape Clause is signed by the seller and buyer and included with the transactional documents. Accordingly, lenders will generate the form and supply it to the parties for their signature.
Because a seller may not understand the extra protections provided to an FHA or VA buyer, the listing agent should familiarize themselves with the Amendatory/Escape Clause so that they can educate and manage the expectations of their client.
This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.
Nikki J. Salgat, Esq., a licensed Arizona attorney, serves as Assistant General Counsel for the Arizona REALTORS®