The Federal Housing Administration and Department of Veterans Affairs require specific disclosure forms to protect borrower interests. The FHA and VA back mortgages made by approved lenders, guaranteeing the lender reimbursement if the borrower defaults. Borrowers with moderate incomes, credit challenges, and low down payments can qualify for an FHA loan. VA loans, which require no down payment, are exclusively for veterans, servicemembers, certain spouses and other VA beneficiaries. Lenders require inclusion of an amendatory clause for most FHA and VA purchase loans.
Cause for the Clause
The FHA or VA amendatory clause notifies the buyer and seller in a government-insured transaction about the buyer's right to back out if the appraised value comes in less than the purchase price. Unless the seller supplies the buyer with advance notice of the home's value before the parties enter into a purchase agreement, the FHA or VA lender requires that the buyer and seller sign an amendatory clause to the contract.
The Department of Housing and Urban Development began mandating the amendatory clause in 1978 to protect buyers from paying penalties when cancelling due to a low appraisal.
The Role of Appraisals in Financing
A home must meet HUD standards to qualify for FHA- or VA-backed financing. Appraisers approved to evaluate homes for the government programs inspect property conditions and compare properties to recently sold homes in order to determine a value.
The buyer is made aware of the home's value by way of a HUD Statement of Value or a VA Notice of Value disclosure form. Unless a home recently underwent an FHA or VA appraisal, such as one conducted as part of a previous transaction that fell through, the buyer has no way of knowing exactly how much the home is worth until an appraisal is completed.
Appraisal Contingencies and Time Frames
Real estate agents may present the FHA or VA amendatory clause with a buyer's offer to purchase, thereby notifying the seller up-front that the home must pass an appraisal evaluation. The purchase contract may contain a separate appraisal contingency, which also protects the buyer's right to back out within a specified amount of time and without penalties.
Even if a contract contains an appraisal contingency, the FHA and VA require that buyers and sellers sign the amendatory clause before closing. The FHA or VA appraisal must be completed within the time frame specified under the appraisal contingency, unless the seller agrees to give the buyer more time.
When Value Comes in Low
The dollar amount inserted into the blank space on an FHA or VA amendatory clause disclosure form must match the contract purchase price, according to instructions noted on the form. If the appraised value comes in lower than the purchase price, the buyer and seller must renegotiate the price; the buyer must pay the difference out-of-pocket to cover the amount that the FHA or VA will not insure, or the buyer can back out of the deal without a penalty.
- FHAInfo.com: FHA Loans: The Mortgage First-Time Home Buyers Love
- Gustan Cho Associates: What Is The FHA Amendatory Clause And Who Is Obligated To Sign It
- Department of Housing and Urban Development: HUD 4155.1, Mortgage Credit Analysis for Mortgage Insurance
- Department of Veterans Affairs: Chapter 13: Value Notices Exhibit 1 -- LAPP Lender’s Notice of Value
- Wells Fargo: FHA Amendatory Clause
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