The FHA Amendatory Clause | What is it and Who Does it Benefit?

Last updated on March 26th, 2024 at 10:32 pm

The FHA amendatory clause is known by a few different names: The FHA Purchase Agreement Addendum, the FHA Escape Clause, or  the FHA Amendment to Purchase Agreement. 

Despite its multiple names, the vertiage of the FHA amendatory clause is fairly straightforward, and this article will guide you through exactly what it does. 

FHA loans are insured by the Federal Housing Administration, and are designed to help first-time homebuyers achieve the “American Dream” of homeownership.

The FHA home loan program offers a variety of benefits, including flexible qualification criteria, low down payment requirements, competitive interest rates, and often down payment assistance program options.

The FHA amendatory clause is a mandatory provision in a purchase offer that protects buyers and lenders who finance a home through the Federal Housing Administration (FHA).

The clause states that if the home’s appraised value is lower than the agreed upon sales (contract) price, the buyer has the option to back out of the purchase without any penalty or financial obligation. The clause takes effect if your FHA or VA appraisal value is below the agreed upon contract price, and allows the buyer to receive their earnest money deposit back.

FHA appraisals are required to ensure that the property meets the minimum property standards set by HUD & FHA, and that the loan amount is appropriate based on the property’s value. 

An FHA appraisal must be conducted by a licensed or certified appraiser who has completed additional training and certification to appraise homes for FHA financing.  

Once assigned, the appraiser will evaluate the property’s size, location, features, and comparable sales in the area, among other factors, to determine its market value.

The FHA amendatory clause is designed to protect both the buyer and the lender in these situations. 

Suppose the appraised value of the property is found to be lower than the sales price agreed upon… In that case, the buyer and seller can attempt to renegotiate the terms of the contract. 

If no agreement can be made, the buyer may terminate the contract without any penalties or financial obligations, and will not lose their earnest money deposit. 

This is the benefit of the FHA amendatory clause – to protect buyers from inadvertently overpaying for a property. 

The following is the verbiage included in the FHA Amendatory Clause form, which must be signed by both buyer and seller in order to proceed with the loan. 

Source: www.hud.gov

“It is expressly agreed that notwithstanding any other provisions of this contract, the purchaser shall not be obligated to complete the purchase of the property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise, unless the purchaser has been given, in accordance with HUD/FHA or VA requirements, a written statement by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement lender setting forth the appraised value of the property of not less than $___________*.

The purchaser shall have the privilege and option of proceeding with consummation of the contract without regard to the amount of the appraised valuation. The appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure.

HUD does not warrant the value or condition of the property. The purchaser should satisfy himself/herself that the price and condition of the property are acceptable. *

Mortgagees must ensure the actual dollar amount of the sales price stated in the contract has been inserted in the amendatory clause. Increases to the sale price require a revised amendatory clause.”

The FHA amendatory clause is a mandatory requirement for both the buyer and the seller to sign. If either party refuses to sign the FHA amendatory clause, FHA will not proceed with financing.

Buyers can withdraw from the contract without losing their earnest money deposit if the property’s appraised value exceeds the agreed-upon sales price.

The amendatory clause protects buyers from being obligated to pay more for a property than its appraised “market” value, preventing potential financial strain. 

Although it may seem otherwise, it’s important to note that the FHA amendatory clause does not inherently harm sellers. 

Sellers are only impacted if the property’s appraised value is lower than the agreed-upon sales price. 

If this situation occurs, the seller can renegotiate the sales agreement or terminate the transaction with no undue harm to either party.

No. There are no exceptions to the FHA amendatory clause if you obtain an FHA loan. The clause is a standard requirement for FHA-insured loans and exists to protect the buyer’s interests in the transaction. 

Consulting with a real estate professional or your lender is always advisable to understand any specific circumstances or exceptions that may apply to your situation.

FHA loans are government-backed mortgages insured by the Federal Housing Administration. They are designed to help first-time homebuyers and/or those with lower credit scores and income.

• Down Payment: As low as 3.5%
• Credit Score Requirements: Minimum 580 for maximum financing
• Mortgage Insurance: Required, regardless of down payment amount
• FHA Loan Limits: Varies by county

More on FHA loan requirements.

The FHA appraiser will complete an onsite inspection of your home to determine its market value, and to ensure that it meets the specific guidelines set forth by the US Dept of Housing and Urban Development. (HUD)

The home must meet certain criteria to qualify.

• The property is in good condition and free of major defects
• Utilities must be on and operational
• The lot is graded so moisture flows away from the house. (No excessive standing water or dampness)
• The property is free from structural issues 
• The roof will last at least two more years
• There is no lead-based chipping paint
• There are no hazardous concerns such as mold, mildew, rot, or close proximity to landfills, power lines, gas xxx etc. 
• Well and septic locations, if applicable, meet required HUD minimum distance guidelines.

If the appraiser notes repair items to be completed, this will be noted in their report and must be remedied before the closing can occur. 

The FHA amendatory clause is an important safeguard for both buyers and sellers in the real estate market. For buyers, it ensures that they are not overpaying for a property relative to its market value. 

For sellers, while it may seem like a potential obstacle, it ultimately contributes to a fairer, more transparent market for all involved. 

In many cases, an appraisal coming in below the sales price will require renegotiation of some type, no matter what type of loan the buyer is using. 

Being aware of this clause and understanding its implications are important for any FHA home buyer or seller to be aware of for a smooth and successful home buying process. 

Consultation with experienced real estate professionals and lenders can provide further insights and guidance.