The Federal Housing Administration (FHA) offers protection by way of the FHA amendatory clause to you as the buyer that other types of home loans do not offer. While this clause was primarily designed to protect the FHA, the buyer ends up with added protection.
What is the FHA amendatory clause requirement?
The FHA amendatory clause ensures that the home is worth enough to secure the loan. The home appraisal value needs to be no less than the contract sales price. So if you are buying a home for $300,000 the appraisal needs to be $300,000 or above.
When does the Clause Kicks In?
If the appraisal does come in at less than the selling price, the FHA declines to allow the loan to go through. In some cases, however, things are moving along at a pace in which the appraisal is not submitted early enough to stop the process without the buyer losing money or FHA being on the hook for an overpriced house. This is when the clause takes effect.
What's in it for buyers?
The FHA amendatory clause specifically states that the buyer is not legally required to go through with a home sale if the appraised value comes back lower than the price listed on the sales contract.
What's more, if this happens, the buyer gets back his or her deposit and doesn't have to pay any kind of penalty, even if one was spelled out in the purchase and sales contract.
Who signs the FHA amendatory clause?
The buyer, co-buyer (if applicable), seller, buyer's agent, and seller's agent are all required to sign the FHA amendatory clause before the lender performs the necessary appraisal on the home. It's required that each party involved sign the clause for the deal to go through.
The Buyer Does Not Have to Back Out
The buyer can, if he or she chooses, pay the difference between the appraised value and the price listed on the sales contract. The primary concern for the FHA is that it only backs a loan for as much as the house is worth. Leveling the field by the buyer paying the difference could get the sale to go through. The clause allows for the buyer to back out if desired or unable to make up the difference. The buyer is not obligated to do so, however, and can simply cancel the sale without any financial penalty.
When an FHA amendatory clause isn't required
According to the U.S. Department of Housing and Urban Development (HUD), there are some instances where an FHA amendatory clause isn't required to close on a home.
Those instances include:
Real estate owned by HUD
Sales by Fannie Mae, Freddie Mac, the Department of Veterans Affairs (VA), Rural Housing Services, or other federal, state, and local government agencies
Sales where the borrower will not be the owner-occupant