What is FHA's Amendatory Clause?
Short Answer:
The FHA's Amendatory Clause is a provision in the sales contract for a property being purchased with an FHA loan. This clause ensures that buyers can reconsider the purchase without losing their earnest money deposit if the home does not appraise for at least the purchase price.
Long Answer:
When navigating the world of home buying, especially for first-time buyers, understanding the various clauses and requirements can be daunting. One such important component in the realm of FHA loans is the Amendatory Clause. But what exactly is the FHA's Amendatory Clause, and why is it significant?
What is the FHA's Amendatory Clause?
The Federal Housing Administration (FHA) Amendatory Clause is a critical part of the home buying process for those utilizing an FHA loan. This clause is designed to protect the buyer by ensuring that they are not obligated to complete the purchase of a property if the appraised value is lower than the purchase price. Essentially, it provides an "out" for buyers, allowing them to reconsider the purchase without losing their earnest money deposit if the home does not appraise for at least the purchase price.
Why is the Amendatory Clause Important?
- Buyer Protection: The primary purpose of the Amendatory Clause is to safeguard the buyer. In real estate transactions, the appraised value of a property is crucial as it determines the maximum loan amount the FHA will insure. If a property appraises for less than the agreed-upon purchase price, the buyer has the right to renegotiate the price or withdraw from the transaction without penalty.
- Financial Security: By ensuring that buyers are not overpaying for a property, the clause helps maintain financial stability. It prevents buyers from being locked into a mortgage that exceeds the property's value, which could lead to financial strain or difficulty in reselling the home in the future.
- Market Stability: On a broader scale, the Amendatory Clause contributes to market stability by discouraging inflated property values. It ensures that properties are sold at fair market value, which benefits both buyers and the housing market as a whole.
How Does the Amendatory Clause Work?
When a buyer applies for an FHA loan, the Amendatory Clause must be included in the sales contract. This clause states that the buyer is not obligated to proceed with the purchase if the property's appraised value is less than the purchase price. If the appraisal comes in low, the buyer has several options:
- Renegotiate the Price: The buyer can attempt to renegotiate the purchase price with the seller to match the appraised value.
- Pay the Difference: If financially feasible, the buyer can choose to pay the difference between the appraised value and the purchase price out of pocket.
- Cancel the Contract: The buyer can opt to cancel the contract without losing their earnest money deposit.
FHA does not require the borrower to cancel the contract if the appraisal comes in low and the seller refuses to lower the sales price.
When Should the FHA Amendatory Clause be Signed?
The FHA amendatory clause should be signed with the original contract before going under contract for the subject home. The amount listed on the FHA Amendatory Clause for which the house should appraise for should be the exact amount of the final offer. The document can be signed electronically with the rest of the contract. Most mortgage underwriters will require the Amendatory Clause to be filled out and presented to the mortgage company before signing off on the mortgage. Therefore, it should be signed before closing.
Conclusion
The FHA's Amendatory Clause is a vital protection for homebuyers using FHA loans, ensuring they are not financially overextended by purchasing a property above its appraised value. Whether you're a first-time buyer or a seasoned homeowner, knowing your rights and protections under the FHA loan program can lead to a more successful and stress-free home buying experience.
