What Is The ‘Mandatory Escape Clause’?
There are plenty of reasons that veterans often prefer to use VA loans over other programs. With the benefit of the VA guaranty, home buyers are able to get a home without having to make a downpayment. This is thanks to the VA’s commitment to 100% financing.
But what happens if the home is being sold for more than the VA is willing to commit? This can happen, specifically when the VA appraisal doesn’t come back the way the buyer and the seller expected.
Take this situation as an example: a homeowner is looking to sell and asks $250,000 for the home. A VA eligible home buyer agrees to the price and proceeds to apply for a VA loan. But when the VA-approved appraiser inspects the home and evaluates it, they determine that the home is only worth $230,000. As a result, the VA is only willing to guaranty $230,000 despite the actual selling price of $250,000, meaning the home buyer needs to come up with an extra $20,000.
This is where the VA’s little known “mandatory escape clause” comes in.
The mandatory escape clause
The VA wants to protect their members, and one of the ways they do that is with the mandatory escape clause.
The mandatory escape clause states that a home buyer does not have to follow through with a purchase if the VA appraisal comes in lower than the asking price for the home.
What’s more, the escape clause even protects the home buyer from any fees or penalties.
As stated by the VA,
“It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise or be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs. (Authority: 38 U.S.C. 501, 3703(c)(1))”
In other words, the home buyer is allowed to back out of the purchase without incurring any type of penalty, whatsoever.
Who does the escape clause help?
The mandatory escape clause is mandatory because home buyers are required to sign it. That’s a good thing, too, since it’s in their own best interest.
With some loan products, backing out of a deal can mean penalties. When buying a home, saving all the money you can is important. While VA home buyers don’t have to pay a downpayment, there are still additional closing costs that need to be considered.
So, if you’re looking to buy a home, don’t worry about the clause; it’s there to protect you.
If you’re looking to sell a home, you’ll have to understand that the VA can have some of the strictest requirements of any loan program. This is something to keep in mind, especially if you’re looking to sell a home quickly and with as little stress as possible.
Can you avoid the mandatory escape clause?
Just because a home buyer signs the clause doesn’t mean they must back out if the appraisal comes in lower than the asking price.
The final part of the mandatory escape clause states that a home buyer may waive the clause and pay the additional money if they want. The only “mandatory” part of the clause is that home buyers must sign it – but that doesn’t mean they’re required to follow it.
There could be plenty of reasons why a home buyer might want to waive the clause. For example, a VA appraisal that comes in barely lower than the asking price could mean just a few thousand out of the home buyer’s pocket. If that’s doable, then purchasing the home might be the right move.
VA loans are largely designed to protect the buyer, but VA home buyers still have freedom in the process. The escape clause is there to protect you, but only if you want it to.