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The FHA Amendatory Clause and Other Important FHA Disclosures
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The FHA amendatory clause gives you the right to back out of buying a home without losing any money if the value doesn’t at least match the sales price. It’s just one of many disclosures you’ll sign if you take a loan backed by the Federal Housing Administration (FHA). Understanding the FHA amendatory clause and other FHA disclosures will help you make an informed decision about your FHA loan.
What is an FHA amendatory clause?
Also called an “Escape Clause,” the FHA amendatory clause is a disclosure that gives FHA homebuyers extra protection to cancel a transaction and receive a refund of any upfront earnest money if the value of the home is below the agreed-upon sales price. The amendatory clause also applies to eligible military homebuyers buying a home with a loan guaranteed by the U.S. Department of Veterans Affairs (VA).
The FHA amendatory clause must be signed by the borrowers before signing the purchase contract, or FHA will not insure the loan when it closes. The amendatory clause does not apply to conventional loans or mortgages backed by the U.S. Department of Agriculture (USDA).
Here are some answers to common questions about the FHA amendatory clause:
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 agree in writing to accept the lower price or negotiate to pay all or a portion of the difference, you can cancel the transaction and receive your earnest money back.
Why is it good for buyers?
It gives homebuyers the right to walk away from a purchase and receive a refund of any upfront money paid if the appraised value doesn’t at least match the sales price. However, the buyers can opt to pay the difference if they still want to purchase the home.
Who signs the amendatory clause?
The FHA amendatory clause must be signed by the borrowers before signing the purchase contract, or FHA (and the VA) will not insure or guarantee the loan when it closes. The form becomes effective when it is signed by the buyer, seller and any real estate agents involved in the transaction. Buyers, sellers and their real estate agents must sign and date the clause.
When is the FHA amendatory clause not required?
Conventional, jumbo (non-VA) and USDA loans don’t require an amendatory clause.
Other important FHA loan disclosures
Besides the FHA amendatory clause, your lender is required to provide the following documents on its FHA disclosure checklist.
FHA informed consumer choice disclosure
This form provides FHA borrowers with a comparison to conventional loan options so borrowers can see the difference and make an “informed” decision about whether FHA financing is in their best interest. One major difference between a conventional mortgage and an FHA is how much mortgage insurance is paid.
Mortgage insurance protects lenders from financial losses in case you default on a loan, and private mortgage insurance (PMI) is required on a conventional loan with less than a 20% down payment. You’ll pay FHA mortgage insurance on an FHA loan regardless of the down payment. The table below shows the cost and important differences to consider when comparing a conventional loan to an FHA loan.
|Mortgage insurance feature||FHA mortgage insurance||Conventional mortgage insurance|
0.45% to 1.05% annual paid monthly
|0.15% to 2.5% annual premium usually paid monthly|
|Minimum credit score||500 for 10% down payment
580 for 3.5% down payment
|Credit score-based premium||No||Yes: The lower the credit score the higher the premium|
|Down payment-based premium||No||Yes: The lower the down payment the higher the premium|
|Waiver policy||Cannot be waived||Waived with a down payment of 20% or more|
FHA property condition requirements
FHA appraisers have to verify your home meets specific guidelines set by the U.S. Department of Housing and Urban Development (HUD). Some criteria unique to an FHA appraisal include verifying that:
- The property is in good conditions
- 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 prepayment notice
If you took out an FHA mortgage before Jan. 21, 2015, you may have seen this form with your initial disclosures. It required payment of an entire month’s worth of FHA interest if you closed on any date besides the first of the month.
However, if you’ve taken out a mortgage since that date, there’s good news: You only have to pay daily interest through the date of closing. The new rule comes in handy if you’re refinancing an FHA loan because it doesn’t put pressure on you to have to pay off your loan by a certain time.
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 loan estimate and closing disclosure
- Your FHA case number. This unique 10-digit number is assigned to your FHA loan once you find a home, and you’ll notice it on all of the other FHA disclosures. The FHA uses this to endorse your loan for mortgage insurance before your loan closes.
- Your APR is typically much higher than your interest rate. 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 “note” rate and your APR, especially if you’re making a down payment of 3.5%. That’s because FHA mortgage insurance is for the life of the loan, whereas conventional mortgage insurance drops off over time.