FHA Amendatory Clause: protecting you from appraisal risk

The FHA Amendatory Clause protects home buyers from appraisal risk. You can cancel the buying agreement if the house is worth less than the agreed price. This change gives you the option to back out if the house's value is lower than what you agreed to pay. This contract amendment is mandatory for all FHA loans used on a home purchase.

What is the FHA Amendatory Clause?

The FHA Amendatory Clause is a standard, mandatory disclosure signed by anyone purchasing a home with an FHA mortgage. This "escape clause" allows you to cancel the purchase contract. The clause triggers when the home appraisal reveals that the house is worth less than the agreed-upon price. You will receive a reimbursement of your Earnest Money Deposit (EMD) when you exercise the clause.

What if I don't want to exercise the FHA Amendatory Clause?

Don't worry, you do not have to exercise the clause. This clause gives you the right to terminate the contract, but it does not require you to find a different home. You may need to increase the amount of money you put down. This is to cover the difference between the appraised value and the price you agreed to pay.

When should I expect to see the FHA Amendatory Clause?

You should sign the FHA Amendatory Clause before you sign a contract to purchase a home. You, the buyer, the sellers, and any real estate agents involved will sign this agreement for the home sale. All parties must sign the clause before the purchase contract for the FHA to accept it.

When does the FHA Amendatory Clause not apply?

The FHA Amendatory Clause is only mandatory for FHA home loans guaranteed by the Federal Housing Administration (FHA). Veterans Affairs (VA) loans include similar feature called an "Escape Clause." Your purchase agreement may already include similar protections even when you’re applying for a Conventional loan program. Be sure to consult with your Realtor to understand what protections apply or can be added to your purchase agreement.

How should I start?

1. If you do not already have an FHA pre-approval, you should work with a lender to obtain one. CapCenter can usually issue a pre-approval within one day, and our mortgages come with ZERO Closing Costs.
2. Work with a real estate agent to tour homes and issue offers. CapCenter offers full-service Realtors, and you will receive additional discounts when you use CapCenter mortgage and realty services.
3. Your Realtor will ensure that everyone signs the FHA Amendatory Clause after agreeing on a price. You must do this before finalizing the purchase contract with the seller.
4. You will receive the home's appraisal report from your lender or real estate agent. You may execute the clause if the selling price exceeds the appraised value.