A VA mortgage loan is one of the biggest benefits that the Department of Veterans Affairs provides to veterans, active-duty military members and families. It makes buying a home affordable by guaranteeing a portion of the loan, which allows lenders to offer better terms, as well as not requiring a down payment.
A VA loan benefit that many buyers may not hear as much about is the VA amendatory clause, also called the VA escape clause. The VA requires that the loan amount not exceed the appraised value of the property. The amendatory clause protects buyers by providing a way for them to get out of the buyer-seller contract without losing their earnest money deposit if the appraiser’s notice of value (NOV), is less than the sales price.
The clause also has provisions that allow the buyer to proceed with the purchase, despite the low appraisal.
What Is the VA Escape Clause?
Sellers ask a buyer make a deposit, known as “earnest money,” when they enter into a sales contract for a home. The money is held in escrow by a third party, often a title company. If the buyer breaks the contract by missing deadlines, not getting financing, having second thoughts, or any other reason, they lose their earnest money because the seller has missed opportunities to sell the house while the contract was in effect.
The VA escape, or amendatory, clause ensures that if the reason for breaking the contract is a low appraisal value, the buyer will get the earnest money back. It is a required attachment to any VA loan agreement if earnest money is put down before the home is appraised.
The clause is similar to amendatory clauses required for FHA loans and contingency clauses often attached to buyer-seller contracts with a traditional mortgage. When a buyer and seller agree to a mortgage, the lender has the home appraised by a professional whose job is to determine the market value of the home by using facts about the home and recent sales in the area for a more objective value than the seller might claim. The appraisal’s notice of value (NOV) ensures that the loan will be backed up by property of at least equal value.
Lenders, in general, don’t like to approve mortgages for amounts higher than the appraised value, but with traditional mortgages there is sometimes wiggle room. VA loans, which allow lenders to offer more favorable terms, don’t allow any flexibility when it comes to the appraisal value. It’s a requirement that the NOV is equal to or higher than the VA loan amount. The VA amendatory clause is specific to VA loans, and applies to all types of VA loans used to purchase a home, be it a single-family home, condominium, manufactured home, multi-family home or new construction.
While someone looking for a home to buy may think that they wouldn’t consider paying more for a home than it’s appraised for, the hot sellers’ market of recent years has driven up home prices to the point that in 2021, an estimated 20% of homes were selling above their appraised value. Industry experts say that trend cooled a little by 2023, but with prices higher than they’ve ever been, it’s still an issue.
Who Benefits from the VA Escape Clause?
The biggest benefit of VA loans is that borrowers can get a mortgage with no money down, yet not be required to pay private mortgage insurance or closing costs. Lenders can offer more favorable terms because the VA is backing the loan. The VA amendatory clause is another big benefit of a VA-backed home loan for a buyer, because its primary purpose is to protect against the financial hit that can come with breaking a purchase contract on a home.
It also benefits buyers by protecting them from buying a home and then owing more on it than it’s worth. Buying a home should help the buyer build wealth. As the mortgage is paid down, the value that the buyer holds in the home increases. If the home is not worth the mortgage amount, then the buyer will not gain value for a long time, if ever.
The VA escape clause allows the buyer to avoid being in that situation by providing a way out of a contract without taking a financial hit. It also allows buyers options to stay in the contract without borrowing more than the property is worth.
The clause also protects the VA from guaranteeing a loan for a home that isn’t worth the mortgage’s value.
Sellers benefit, too. If they don’t sign the VA amendatory clause, the VA won’t approve the mortgage. So, not signing means losing the home sale.
How Does the VA Amendatory Clause Work?
The VA is the guarantor of VA mortgage loans, which means it takes on the debt if the borrower defaults. Naturally, the VA wants to make sure it won’t take a financial loss if that happens. The VA also is committed to making sure that veterans, active-duty military and their families are protected financially.
To protect everyone’s financial interest, an appraisal of the home is required before a borrower can close on it. For the VA loan to be approved, the NOV issued by the appraiser must be equal to or more than the agreed-to sales price.
It’s up to the lender to make sure that the clause is part of the contract and, if the NOV doesn’t meet the amount of the loan, to allow the borrower to leave the contract without losing their earnest money.
If the borrower still wants to buy the property, despite the low appraisal, the clause has provisions for that as well. The buyer and seller can negotiate a lower price, or the buyer can make a down payment for the difference between the appraised value and the sales price.
If a title company or other entity is holding earnest money in escrow, they are required to return the money if the borrower invokes the escape clause and terminates the contract because of a low appraisal value. The VA provides guidance to title companies, real estate agents and others involved in property sales on how the clause works, but does not get involved if a civil dispute arises in regards to a borrower invoking the clause.
It’s important that buyers pay close attention to, and understand, their contract, including the wording of the VA amendatory clause. The official wording is “if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs.” Before signing the clause, borrowers should make sure the word “exceeds” hasn’t been changed to “is not equal to” or some other phrase that changes the meaning.
The contract will also have provisions for what to do if there’s a dispute over whether the earnest money should be returned. Usually, that means mediation. The entity holding the escrow would keep the money until any dispute is resolved.
Requirements of the VA Escape Clause
Contracts for a home that will be bought with a VA loan, including new construction, must include the VA amendatory clause. If a contract doesn’t have the clause when it’s first agreed to, it must be amended to include it, which can be done before, or at, the closing. It’s up to the lender to make sure that it’s there.
The VA amendatory clause can’t be used to get out of a home purchase contract for any other reason than an NOV that’s below the agreed-to sales price.
It only applies to earnest money, not fees a buyer may have paid for a home inspection or appraisal.
A buyer also can’t use it to get deposits back that were made for upgrades on a contract for new construction. These aren’t considered earnest money and the builder is not required to refund them.
Can You Waive the VA Amendatory Clause?
A veteran or active-duty military member can still buy a home if the appraisal doesn’t meet the VA loan requirements.
There are two ways to do this:
- The buyer and seller can negotiate a lower sales price that meets the VA loan requirements.
- The buyer can make a down payment that closes the gap between the appraisal amount and the sales price.
The VA urges home buyers who plan to get a VA loan to talk to their veteran benefits representative about how they work and understand the VA escape clause before signing a purchase-and-sale contract. The VA also offers resources, including a thorough home-buying guide that covers every aspect of the process.
It’s also a good idea to work with a real estate agent when buying a home. A knowledgeable real estate agent will make sure the purchase and sale contract has a VA amendatory clause if a VA loan is going to be used to pay for the property.
About The Author
Maureen Milliken has been writing about finance, banking, investment, entrepreneurship, real estate and other related topics for more than 30 years. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and currently is one of the hosts of the Mainebiz business-focused podcast, “The Day that Changed Everything” in addition to her daily writing. She also is is the author of three mystery novels and two nonfiction books.
- N.A. (ND) VA Home Loans. Retrieved from https://www.benefits.va.gov/homeloans/index.asp
- N.A. (ND) VA Home Loan Buyer’s Guide. Retrieved from https://www.benefits.va.gov/HOMELOANS/documents/docs/VA_Buyers_Guide.pdf
- N.A.(ND) VA Escape Clause. Retrieved from https://www.benefits.va.gov/homeloans/escape-clause.asp
- N.A. (ND) What to Know About the Appraisal Process. Retrieved from https://www.nar.realtor/magazine/tools/client-education/handouts-for-buyers/what-to-know-about-the-appraisal-process
- Rudy, M. (2022, November 30) How Often Do Home Appraisals Come in Low? Here are the Odds. Retrieved from https://www.homelight.com/blog/how-often-do-home-appraisals-come-in-low/