What Is The FHA Amendatory Clause?

When seeking a mortgage, you might consider an FHA loan for buying a home, especially if you have a lower credit score and a smaller down payment. FHA loans, overseen by the U.S. Department of Housing and Urban Development (HUD), offer mortgage insurance on loans from FHA-approved lenders.

These loans are popular among home buyers, so it’s wise to grasp the nuances of the loan structure. This includes understanding the FHA amendatory clause, also known as the “escape clause.”

What Is The FHA Amendatory Clause?

To complete a home purchase, a borrower is required to sign an FHA amendatory clause. This clause holds significant importance for individuals choosing an FHA loan. In the event that a home’s appraisal comes in lower than the agreed-upon price, the FHA amendatory clause provides FHA buyers with the authority to exit the purchase and receive a refund of their earnest money. Essentially, it affords you, the buyer, the liberty to withdraw without facing any negative consequences.

Effective Date of the Clause

The amendatory clause is triggered if the appraisal falls below the selling price. For instance, if you offer $250,000 matching the for-sale price, but the appraisal is lower, you’d need to cover the shortfall as loans can’t exceed the appraised value. If you lack the funds and the seller won’t lower the price, the amendatory clause lets you exit the deal.

If you still wish to proceed with the purchase, you can formally agree to a reduced price or negotiate to cover part or all of the difference.

Benefits of the Clause for Buyers

Appraisals serve as a safeguard, preventing lenders from granting loans exceeding a property’s value. They also shield buyers from overpaying, empowering them to withdraw from a purchase while reclaiming their earnest money deposit.

Signing Parties and Dates

The FHA amendatory clause requires the signatures of the buyer, co-buyer, seller, buyer’s agent, and seller’s agent. Failure to sign will result in the FHA declining to insure or guarantee the loan. 

FHA Amendatory Clause Requirment

An FHA amendatory clause is unnecessary for specific home purchases, such as in the following scenarios:

• HUD sales of real estate-owned properties
• Government agencies such as Fannie Mae, Freddie Mac, the Department of Veterans Affairs (VA), and Rural Housing Services handle home sales.
• Real Estate Auctions
• Non-owner-occupied sales transactions.

The Real Estate Certification Form

The FHA Amendatory Clause and Real Estate Certification typically complement each other. The real estate certification form requires signatories of the sales contract to confirm their understanding and acceptance of the specified terms and conditions. Signatories must truthfully attest to the accuracy of the sales contract terms and any additional agreements related to the real estate transaction. 

This certification ensures that the seller, buyer, real estate agent, and all involved parties acknowledge and abide by the terms outlined in the sales agreement, without any undisclosed “side agreements” outside the contract’s scope.

Key Takeaway

The FHA amendatory clause safeguards borrowers by allowing them to cancel the transaction and recoup their earnest money if the appraisal returns low. Committing to a home that appraises below the sale price poses risks for both lenders and buyers, leading to potentially poor investments.

Hence, FHA addendums, like this one, introduce provisions and safeguards into purchase agreements to benefit both buyers and lenders, ensuring protection for a buyer’s deposit.

Are you considering buying your own home? Whether you’re looking into FHA loans or other options, kickstart the mortgage approval process today.