FHA amendatory clause

Quick insights

• The FHA amendatory clause protects homebuyers from being locked into a purchase if the home appraises for less than the agreed price.
• This way, buyers may renegotiate or walk away with their earnest money fully refunded.
• The clause plays a key role in helping homebuyers avoid unexpected financial setbacks during the homebuying process.

Imagine getting far into a home purchase, only to learn during the appraisal that it’s worth less than what you agreed to pay. What happens next? If you’re using an FHA loan, you’re protected by the FHA amendatory clause. This built-in safeguard gives you the right to walk away from the deal or renegotiate the price if the home doesn’t appraise for the full purchase amount.

What is an FHA amendatory clause?

The FHA amendatory clause is a provision in home purchase agreements for first-time homebuyers using an FHA loan. If the home’s appraised value is lower than the agreed-upon purchase price, this clause gives the homebuyer the option to back out of the deal without losing their earnest money.

Why is it good for buyers?

The FHA amendatory clause form is a valuable safeguard for homebuyers, especially those navigating the process for the first time. With the FHA amendatory clause, the buyer isn’t financially obligated to move forward unless they choose to. This protection helps prevent overpaying for a property, and may give homebuyers the option to negotiate or walk away without losing their earnest money.

How the FHA amendatory clause works

This clause is activated when the property’s appraisal comes in below the agreed purchase price. In such cases, the buyer has a few options. They can choose to renegotiate the price with the seller to reflect the lower appraisal. If the buyer still wants to proceed at a reduced price, a new contract including the FHA amendatory clause must be signed. Alternatively, if the buyer decides not to go forward, the clause ensures the return of their earnest money deposit.

When does the homebuyer sign the FHA amendatory clause

In general, the clause would be signed before any purchase contract. Homebuyers should have an opportunity to sign the clause before the appraisal takes place. The result of the appraisal determines if the FHA insures the loan at closing.

Example of the FHA amendatory clause in action

You’re planning to buy a house for $300,000. If the appraised value is less than that, you’d be required to pay the difference because the loan wouldn’t exceed the appraised value. This is when the amendatory clause can be exercised. You could potentially renegotiate or back out of the sale entirely. You may still continue with the original price; however, the lender will require you to acknowledge your understanding of your decision including making a higher down payment.

Do all mortgage types require an amendatory clause?

While the FHA amendatory clause is unique to FHA loans, other loan types offer similar protections. For instance, VA loans include the VA Escape Clause, which functions in a comparable way by protecting homebuyers from being forced to complete a purchase when the home doesn’t appraise. Conventional loans and jumbo loans, on the other hand, do not come with a built-in provision like the FHA clause. However, buyers can negotiate an appraisal contingency to serve a similar purpose.

In summary

The FHA amendatory clause protects homebuyers if the appraised value of a home is lower than the purchase price. Specific to FHA loans, the clause allows a buyer to walk away from the deal or renegotiate without losing their earnest money. The clause plays a role in helping homebuyers avoid unexpected financial setbacks in the process, such as overpaying.