The FHA Amendatory Clause and Other Important FHA Disclosures
The FHA amendatory clause gives you the right to back out of buying a home without losing any money if the appraised value doesn’t meet or exceed the sales price. It’s just one of many disclosures you’ll sign if you take out 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.
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What is an FHA amendatory clause?
Also called an “Escape Clause,” the FHA amendatory clause is a disclosure that gives FHA loan borrowers 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.
The purpose of the FHA amendatory clause is to set the maximum amount the Department of Housing and Urban Development (HUD) will insure a loan for. This cap on loan amounts protects HUD and FHA-approved lenders from getting ensnared in potentially bad investments.
The amendatory clause applies to FHA homebuyers and eligible military borrowers buying a home with a loan guaranteed by the U.S. Department of Veterans Affairs (VA).
The amendatory clause does not apply to conventional loans or mortgages backed by the U.S. Department of Agriculture (USDA).
A mortgage lender is not going to lend you more for a home purchase than the home is worth since it is bad business. (One exception to this rule is a cash-out refinance, but you’ll have to secure the loan with some of your home equity.)
That said, if the appraisal comes in below the sale price you aren’t required to back out of the transaction. If you still want the home, you’ll have to cover the difference between the sale price and the FHA loan amount yourself.
When does the FHA amendatory clause need to be signed?
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.
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. Buying a home for more than the sale price is risky, and the amendatory clause protects the buyer as well as the FHA and the lender. However, a buyer can opt to pay the difference if they still want to purchase the home.
Is the FHA amendatory clause bad for sellers?
At first glance the FHA amendatory clause might seem a little bit unfair to some sellers — especially since it isn’t easy for a seller to back out of a real estate contract. However, many times simply reading the actual FHA amendatory clause form can help ease sellers’ worries. 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.
“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.Note: The dollar amount to be inserted in the amendatory clause is the sales price as stated in the contract. If the borrower and seller agree to adjust the sales price in response to an appraised value that is less than the sales price, a new amendatory clause is not required. However, the loan application package must include the original sales contract with the same price as shown on the amendatory clause, along with the revised or amended sales contract.
As long as the seller hasn’t lied on the form, they don’t need to worry about the FHA amendatory clause.
Who signs the amendatory clause?
You as the homebuyer sign the FHA amendatory clause before you sign the purchase contract, or FHA (and the VA) will not insure or guarantee the loan when it closes. The form isn’t complete until it is signed by the buyer, seller and any real estate agents involved in the transaction.
When is the FHA amendatory clause not required?
The following loan types don’t require an amendatory clause:
- Conventional loans
- Jumbo loans (non-VA)
- USDA loans
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 real estate certification clause
The real estate certification clause appears on the same form as the FHA amendatory clause, and is even simpler. It 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. Both clauses are there to protect the lender, HUD and the buyer.
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 you’ll pay.
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 |
|---|---|---|
| Cost | 0.15% to 0.75% annual premium (paid monthly) 1.75% of total loan amount (paid upfront) | 0.15% to 2.5% annual premium usually paid monthly |
| Minimum credit score | 500 for 10% down payment 580 for 3.5% down payment | 620 |
| 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 |
Lower MIP premiums in 2023
The FHA recently reduced its annual mortgage insurance premiums (MIPs) by 0.30%. The reduced premium will help to lower your monthly payments — borrowers with FHA loans are expected to save an average of $800 per year!
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
FHA loans require the same loan estimate and closing disclosure forms as any other type of home loan. However, there are few things you’ll notice that will be specific to FHA loans:
- 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 the APR versus interest rate, 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.