What is FHA Amendatory Clause?

What is FHA Amendatory Clause

Table of contents

When buying a home, homebuyers and sellers expect to sign a number of documents, such as sales agreements, mortgage loan documents, and many others. If you are a homebuyer looking to buy a home with an FHA (Federal Housing Administration) mortgage or a seller selling to someone with an FHA loan, you will have at least one additional document to sign. The FHA Amendatory Clause, often referred to as the escape clause, is a disclosure that allows the buyer to walk away from the sale if the home appraisal comes back lower than the sale price.

Here we will take a closer look at exactly what the FHA amendatory clause is, who is required to sign it, when it may not be required, and what it means to the buyer and the seller.

The buying process can be difficult or confusing, especially for first-time buyers. The FHA appraisal clause helps to ensure buyers are not overpaying for a property.

Key takeaways

  • The FHA Amendatory Clause protects homebuyers from getting FHA-insured loans if a home’s appraisal is lower than the sale price.
  • This clause lets buyers renegotiate the price, walk away without penalty, or pay the difference if the home is worth less than expected.
  • The FHA appraisal process includes hiring a local appraiser who evaluates the home’s value. If the home’s appraised value is less than the sale price, the buyer can exercise their rights under the FHA Amendatory Clause.
  • The Amendatory Clause is required for FHA loans but not for other types like conventional mortgages. It’s signed by the buyer, seller, and their real estate agents.
  • Buyers can review the appraisal report, ask for a second appraisal, renegotiate the sale price, proceed with the sale by paying extra, or back out of the sale if the home’s appraisal is less than the sale price.

What is an FHA amendatory clause?

An FHA amendatory clause is a provision that is typically included in real estate purchase contracts involving FHA-insured loans. It is signed by the buyer, seller, and their respective real estate agents. It is designed to protect the buyer in the event that the property’s appraised value is lower than the agreed-upon purchase price.

The FHA amendatory clause states that if the appraised value is lower than the sales price, the buyer has the option to either proceed with the purchase at the agreed-upon price or terminate the contract without facing any penalties or losing their earnest money deposit. Essentially, it gives the buyer an opportunity to renegotiate the purchase price or walk away from the transaction if the property is deemed to be worth less than the agreed-upon price.

Purpose and benefits of the FHA amendatory clause

The purpose of the FHA amendatory clause is to protect the buyer and ensure fairness in real estate transactions that involve FHA-insured loans. Here are some benefits of the FHA amendatory clause:

  • Buyer protection: The clause gives buyers the option to reconsider the purchase if the appraised value is lower than the agreed-upon price. This protects them from being forced to pay more for a property than it is worth.
  • Appraisal accuracy: The clause helps ensure that the property is appraised accurately and reflects its true market value.
  • Prevents overpaying: The FHA amendatory clause prevents buyers from overpaying for a property by requiring them to either renegotiate the price or back out of the contract if the appraised value is lower. This safeguards buyers from assuming excessive debt for a property that may not be worth the purchase price.
  • Financing protection: The clause helps protect the FHA lender by ensuring that the property being financed has sufficient value.

Understanding the appraisal process in relation to the FHA amendatory clause

To better understand the FHA amendatory clause, it is first necessary to understand the appraisal process when it comes to purchasing a home with an FHA loan. Let’s take a closer look at the appraisal process, what it involves, and how the results relate to the FHA amendatory clause.

  • Ordering an appraisal: After a buyer and seller agree on a purchase price for a property, an FHA lender will order an appraisal. The lender selects a licensed appraiser who is familiar with the local market to evaluate the property’s value.
  • Evaluating the home: The appraiser visits the property and conducts a thorough evaluation. They consider factors such as the property’s size, condition, location, amenities, and recent sales of similar properties in the area to determine its market value.
  • Providing an appraisal report: Once the appraisal is complete, the appraiser provides a detailed appraisal report that includes the property’s estimated value based on their assessment.

The FHA amendatory clause comes into play when comparing the appraised value to the purchase price. If the appraised value is equal to or higher than the purchase price, there is no problem. The buyer can proceed with the purchase as planned. However, if the appraised value is lower than the purchase price, the FHA amendatory clause allows the buyer to exercise specific options. The buyer may choose to walk away from the purchase of the home and receive a refund of any earnest money, renegotiate the purchase price with the seller based on the appraisal results, or move forward with the sale by paying the difference.

Ultimately, the buyer has the final say regarding whether to proceed with the purchase, renegotiate the price, or terminate the contract based on the appraised value and their assessment of the property’s worth.

What to do if the appraised value is lower than the sales price

If the appraisal on a property comes back lower than the sale price, a buyer can take a few steps before they decide to exercise their rights through the FHA amendatory clause.

First, you want to take a closer look at the appraisal report and the process the appraiser used to determine value. How did the appraiser arrive at a lower value? Were comparable sales used and were adjustments made for property differences? If you believe the appraisal may be inaccurate, you can request a second appraisal. However, this may incur additional charges.

If the appraisal looks good or the second appraisal comes back the same, as a buyer, you have some decisions to make. You may opt to renegotiate the price with the seller to meet the new appraisal value, you may opt to move forward with the sale and provide additional closing funds to the closing, or you may request to terminate the sale and receive any earnest money you put forward.

Man putting down blocks spelled FAQ

Frequently asked questions

If you are a first-time buyer, the home-buying process can be overwhelming, and you are likely to have many questions. When it comes to the FHA amendatory clause, we answer some of the common questions we receive.

Is the FHA amendatory clause required?

If you are purchasing a home with an FHA mortgage loan, the Federal Housing Administration requires the use of an FHA amendatory clause. If you are purchasing a home with another loan option, such as a conventional mortgage, the clause is not required.

When is the FHA amendatory clause not required?

The FHA amendatory clause is not required for any home sale purchase unless it involves an FHA loan. This includes HUD sales, other government sales, such as VA, USDA, Fannie Mae, and Freddie Mac, conventional home loans, and foreclosure sales.

Who signs the FHA amendatory clause?

When it comes to signing the FHA amendatory clause, the buyer and seller, as well as the buyer’s real estate agent and the seller’s real estate agent, are required to sign the form.

Taking advantage of the FHA amendatory clause

As a buyer, the FHA amendatory clause offers you protection through the home-buying process. It provides you with choices when it comes to purchasing a home that appraises less than the sale price, allowing you to choose the direction you want to take moving forward.

Walking you through the homebuying journey

At Hero Home Programs, our goal is to help everyone achieve home ownership. We know how confusing the homebuying process can be, and our job is to help walk you through your home-buying journey, answering all your questions along the way. If you are looking to purchase a home, let the team at Hero Home Programs help you find the right programs for you and maybe even save you some money in the process.

Jacquelyn Sublett
Jacquelyn Sublett

I love teaching and writing on real estate, finance and mortgage topics. I find it fulfilling hearing stories of first time home buyers who we have helped with the home buying process. Writer for the Hero Homebuyer Programs™

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