What Is The VA ‘Mandatory Escape Clause’?
There are plenty of reasons active-duty service members and veterans prefer to use VA loans. With the benefit of the VA guaranty, home buyers are able to get a home without having to make a down payment. 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.
This is where the VA’s little-known “mandatory escape clause” comes in.
The VA Mandatory Escape Clause
The VA wants to protect its members, and one of the ways it does 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.
According to 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?
With some loan products, backing out of a deal can mean penalties. For buyers looking to save as much money as possible, that’s a good thing.
In a hot market where homes are selling for way above market prices, low appraisals are more common. With other loan types, the buyer would have to include an appraisal contingency in their offer to ensure they can back out of the sale in the event that the house does not appraise for the purchase price. These contingencies can make an offer less attractive to a seller, especially in a competitive market. So, if you’re looking to buy a home, don’t worry about the clause; it’s there to protect you – and your earnest money – in the event that the house doesn’t appraise at the expected price.
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 allows a home buyer to 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 decide not to back out. 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 proceeding with the purchase 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.
VA escape clause FAQ
What is a VA escape clause?
A VA escape clause allows a buyer to walk away from the deal if the home’s appraised value is less than the contract price. If the buyer walks away for this reason, they will get their earnest money deposit back.
Does the VA require an escape clause?
Yes, the VA requires an escape clause. With this mandatory escape clause, the buyer can back out of the deal without losing their earnest money if the home appraises for less than the contract price.
What is the purpose of the VA mandatory escape clause?
The goal of the VA mandatory escape clause is to protect a VA home buyer if a home appraises for less than the contract price. If an appraisal determines that the value of the home is lower than the contract price, the VA buyer can back out without losing their earnest money.
Since the Department of Veterans Affairs backs the VA loan, it makes sense that the government agency wants to protect the interests of veteran buyers who meet specific eligibility requirements.
Can a VA buyer waive the appraisal contingency?
You cannot waive the appraisal contingency if you are a VA buyer. The Department of Veterans Affairs requires buyers to keep both the appraisal contingency and escape clause in the contract.
If the home appraises for less than the contract price, the VA will only back a loan for up to the appraised amount. But the buyer will have the opportunity to make up the difference out of their own pocket.
When is the VA escape clause not required?
A VA escape clause is required for all VA home loan sale contracts. FHA loans have a requirement in the amendatory clause.
However, other loan types, such as conventional loans, are not subject to this requirement.
Who is required to sign the VA escape clause?
Both the buyer and the seller must sign the VA escape clause form. If you have questions about the VA amendatory escape clause for your home sale, discuss the details with your real estate agent. A qualified real estate professional can help you set the right sales price to avoid any underwriting issues due to this clause.
Does a seller have to sign the VA escape clause?
No, a seller doesn’t have to sign the VA escape clause. But by refusing to sign, the seller cannot accept the offer of the veteran buyer.
It is worth pointing out that many buyers with all kinds of loans will insist on an appraisal contingency. After all, buyers don’t want to be locked into a deal where the valuation of the property doesn’t match the sale price. With that, most sellers will decide to sign this clause even if it is not ideal.
What if buyers don’t use the escape clause?
The buyer doesn’t have to use the escape clause. However, the VA will only back the loan for up to the guaranteed amount. With that, borrowers who waive the escape clause will have to come up with the additional funds on their own.
Unfortunately, a hot real estate market may require more buyers to waive the escape clause.