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The FHA Amendatory Clause, What You Should Know

The first thing you should know about the FHA amendatory clause is that it goes by many names. If you're looking for information on the "FHA Purchase Agreement Addendum," the "FHA Escape Clause," or the "FHA Amendment to Purchase Agreement," you've come to the right place. Despite having many names, the FHA amendatory clause is pretty easy to understand, and don’t worry, we're here to walk you through it.

What is the FHA amendatory clause?

The FHA amendatory clause, most commonly referred to as the “FHA Amendment to Purchase Agreement,” is included in real estate contracts and protects the buyer from completing a home purchase if the property's appraised value is lower than the agreed-upon sales price.

What is the FHA real estate certification?

The FHA real estate certification is typically presented in a joint document with the FHA amendatory clause. It simply certifies that the terms and conditions of the sales contract are true to the best of the knowledge of all parties involved. While the FHA amendatory clause only requires signatures from the buyer and seller, the real estate certification also needs signatures from the buyer and seller's real estate agents.

The FHA Appraisal

[For a home to be approved by the FHA, it must undergo an appraisal]( to ensure that it meets the FHA's minimum property standards and that the loan amount aligns with the property's value. A professional appraiser will determine the home’s market value, and the FHA will only approve a loan for the appraised value.

What happens if the appraised value is lower?

When the appraised value of a home is lower than the selling price, the amendatory clause kicks in and protects the buyer from being penalized for backing out of the sale. The clause also allows a refund of any earnest money a buyer may have put down.

The Buyer Can Continue With the Sale

When an appraisal comes in below the asking price, a buyer has several options. They can renegotiate the sales price with the seller based on the appraised value or cover the difference between the appraised value and the asking price in cash. If neither of these options is viable, the buyer can then choose to terminate the contract without penalty, as protected by the FHA amendatory clause.

Is the FHA amendatory clause mandatory?

Yes, the Federal Housing Administration (FHA) requires the inclusion of this clause in real estate contracts when financing is obtained through an FHA loan.

Benefits of the FHA Amendatory Clause for Buyers

The clause allows buyers to withdraw from the contract without penalty if the property's appraised value exceeds the agreed-upon sales price. The FHA amendatory clause protects buyers from being obligated to pay more for a property than its appraised value, preventing potential financial strain.

Does the FHA amendatory clause hurt sellers?

The FHA amendatory clause does not inherently hurt sellers. The only situation in which sellers are impacted is if the property's appraised value is lower than the agreed-upon sales price. In this case, the seller has the freedom to renegotiate the sales agreement, and if an agreement cannot be reached, the transaction will be terminated without harming the buyer or seller.

What if the seller won’t sign the FHA amendatory clause?

If the seller refuses to sign the FHA amendatory clause, it can create complications for an FHA loan transaction. Without the seller's signature, the buyer may need to negotiate with the seller to ensure compliance or consider other options, such as finding a different property or exploring alternative financing options that do not require the FHA amendatory clause. It's advisable to consult with a real estate professional or loan officer to explore the best course of action in such a situation.

Are there exceptions to the FHA amendatory clause?

There are no exceptions to the FHA amendatory clause for buyers obtaining financing through the FHA home loan program. The only alternative is to obtain financing through a separate housing program such as Fannie Mae or Freddie Mac, for example.