What Is an FHA Amendatory Clause?

Anna-Louise Jackson, Editor at LendingTree

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The FHA amendatory clause gives you the legal right to walk away from a home purchase and recover your earnest money if the property appraises for less than what you’ve agreed to pay. This clause is a protection that conventional loan borrowers don’t automatically receive, though it’s common for any home sale contracts to contain an appraisal contingency.

Understanding the FHA amendatory clause is important because it both limits you and gives you options. It limits how much you can borrow with an FHA loan, but also gives you the option to back out of a sales contract. Alternatively, you can move forward with the sale if you choose, knowing that your mortgage won’t cover the full amount of the home price.

What is the purpose of the FHA amendatory clause?

Also called an “Escape Clause,” the FHA amendatory clause gives you the ability to back out of purchasing a home — and receive a refund of any upfront earnest money — if the value of the home is below the agreed-upon sales price.

That said, you aren’t required to back out of the transaction. If you still want the home, you’ll either have to renegotiate the home price or find a way to cover the difference between the sale price and the FHA loan amount yourself.

The other main purpose of the FHA amendatory clause is to set the maximum amount for which the Department of Housing and Urban Development (HUD) will insure a loan. This cap on loan amounts protects HUD and FHA-approved lenders from getting ensnared in potentially bad investments.

Here’s what the FHA mandatory clause says word-for-word:

“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 nor the 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.”

How is the FHA amendatory clause good for buyers?

Buying a home for more than its appraised value is very risky, and the amendatory clause gives homebuyers the right to walk away from such a purchase without being penalized. The risks of purchasing a home for more than its fair market value include:

Negative equity. You’ll owe more on your loan than the home is worth from day one, also known as being “underwater.”
Limited refinancing options. Most lenders require you to have some equity in your home to refinance your mortgage. If you’re underwater, you’ll be stuck with your current loan terms, even if interest rates fall.
Overpaying. If you think a home is worth more than the appraisal says it is, you could be right — but you might just be paying for overpriced amenities or unknowingly buying in a declining market.
Insurance complications. Some home insurance policies are based on the home’s appraised value, which could potentially leave you with less coverage than expected.
Difficulty selling. Buying a home for more than its appraised value could cause you a lot of grief if you want to sell, because you won’t be able to without bringing cash to closing to cover the difference.

Is the FHA amendatory clause bad for sellers?

At first glance, the FHA amendatory clause might seem a little bit unfair to sellers, especially since it isn’t easy for a seller to back out of a real estate contract. However, the clause is straightforward and only lets sellers out of the deal if the appraisal is lower than the sale price; nothing more, nothing less.

That said, sellers should know that FHA buyers can’t actually waive their appraisal protection, even if they say they will. In hot markets, buyers often try to make their offers more attractive by promising to waive appraisal contingencies or make their earnest money non-refundable. But FHA loans don’t work that way — the amendatory clause is mandatory and can’t be waived. If the home appraises for less than the sale price, the FHA buyer can still walk away and get their earnest money back, no matter what they promised in their offer.

When does the FHA amendatory clause need to be signed?

The FHA amendatory clause is a part of the purchase contract and will either be added directly into the contract’s language or attached as an addendum. Usually, when you’re signing the contract, you’ll also sign the amendatory clause. However, in some cases, you may sign the contract beforehand and then sign the amendatory clause addendum later.

Who needs to sign the amendatory clause?
The amendatory clause isn’t final until it is signed by the buyer, seller and any real estate agents involved in the transaction.
When does the clause take effect?
The amendatory clause kicks in if you receive an FHA or VA appraisal that values the home below the sales price. Unless you can then negotiate a lower price or want to pay the difference out of pocket, you can cancel the transaction and receive your earnest money back.
When is the FHA amendatory clause not required?
The FHA amendatory clause is not required when an FHA loan is used to purchase a:
- HUD REO home. “HUD homes” are houses that have been foreclosed on and are now owned by HUD. They’re usually sold at a steep discount and are listed on HUD’s HomeStore website.
- Fixer-upper using an FHA 203(k) loan. These are FHA renovation loans that allow you to purchase a home and finance repairs, all in one mortgage.

Additionally, the following loan types don’t require an amendatory clause:

Conventional loans
Jumbo loans (non-VA)
USDA loans

What is the VA loan escape clause?

VA loans come with a similar requirement to the FHA amendatory clause, known as the “VA escape clause.” The language in both clauses is very similar, and just like the FHA clause, the VA escape clause protects homebuyers by giving them an “out” if the appraisal comes back lower than the sale price.

Other important FHA disclosures

Besides the FHA amendatory clause, your lender is required to provide the following documents on its FHA disclosure checklist:

FHA real estate certification clause

The real estate certification clause asks all of the parties involved in the sale of the home to affirm that everything in the sales contract is true and that there are no strings attached — that is, no other agreements that aren’t in or attached to the sales agreement.

FHA informed consumer choice disclosure

This disclosure shows FHA borrowers how their loan compares to conventional loans, helping them decide which option works best for them. One major difference between a conventional mortgage and an FHA loan is how much mortgage insurance you’ll pay, and for how long.

FHA mortgage insurance is typically more expensive and cannot be waived. Unless you make at least a 10% down payment, you’re also going to be stuck paying this insurance for the life of the loan.
Private mortgage insurance (PMI), on the other hand, can be waived for those homebuyers who make a down payment of more than 20% and you can get rid of PMI once you achieve at least 80% equity in your home.

FHA lead-based paint disclosure

Some homes built before 1978 contained walls with lead-based paint, which was harmful to children and pregnant women. If you’re buying an older home built in this timeframe, you’ll need to fill out a lead-based paint disclosure to acknowledge the issue. You’ll also receive a “Protect Your Family from Lead in Your Home” pamphlet so you know the potential dangers and ways to safely proof your home.

FHA property condition requirements

FHA appraisers have to verify that your home meets specific guidelines set by HUD. Some criteria unique to an FHA appraisal include verifying that:

The property is in good condition
The lot is graded so moisture flows away from the house
The utilities and appliances in the home all work
The roof will last at least two more years
There is no lead-based chipping paint

FHA loan estimate and closing disclosure

FHA loans require the same loan estimate and closing disclosure forms as any other type of home loan. These forms tell you exactly how much you’ll be paying in interest, fees and other closing costs. There are a few things you’ll notice that will be specific to FHA loans:

Upfront mortgage insurance premium (UFMIP). This is a one-time fee that will be included in your FHA closing costs and is usually rolled into your FHA loan amount. The standard cost is 1.75% of your loan amount.
Annual mortgage insurance premium (MIP). This is the ongoing portion of your FHA mortgage insurance, and is calculated as 0.15% to 0.75% of your loan amount.
FHA appraisal. As mentioned above, FHA loans require that you get an FHA-approved home appraisal. They typically cost $400 to $700, which is a little more expensive than a standard home appraisal.
Higher APR. Your annual percentage rate (APR) reflects the total costs you pay over the life of your loan, including mortgage insurance. Because you pay two types of mortgage insurance on an FHA loan, you may see a big difference between your APR versus your interest rate, especially if you’re making a down payment of 3.5%. FHA mortgage insurance can really add up because it’s for the life of the loan, whereas conventional mortgage insurance drops off over time.

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