January 18, 2022

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FHA Home Loans: The Escape Clause

FHA Home Loans: The Escape Clause

Of course it’s not formally known as the “escape clause” but first-time homebuyers should know about the FHA home loan rules that govern what happens if the appraised value of the home comes in lower than the asking price of the real estate.

HUD 4000.1 instructs the lender that a clause must be inserted into any legally binding commitment to purchase the home that guarantees that the borrower does not forfeit earnest money or retain an obligation to purchase the property if the appraisal is lower than the sale price.

The wording of such a clause is suggested in HUD 4000.1 (page 117) as something to this effect:

“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, HUD 4000.1 continues, is permitted to have the option to proceed with the loan “…without regard to the amount of the appraised valuation.”

Furthermore, the borrower should know that the appraisal is NOT a stamp of approval from the FHA/HUD;

“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 or condition of the property. The purchaser should satisfy himself/herself that the price and condition of the property are acceptable.”

Borrowers are free to walk away from an FHA loan transaction where the appraisal is less than the sale price in part because otherwise the buyer is forced to pay the difference out of pocket and it cannot be financed.

Conversely, if you want to buy the home anyway and have no issues paying the difference between the appraisal and the asking price upfront, there is nothing to prevent you from doing so.

If you aren’t sure how this will affect your home loan transaction, ask your loan officer to explain how these rules work.

Are you a first-time homebuyer? Get put in touch with a participating lender today.

Bruce Reichstein - FHA News Author

By Bruce Reichstein

January 7, 2022

Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.

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