What is an FHA amendatory clause?

When you're on the hunt for a mortgage, you may eyeball a Federal Housing Administration (FHA) loan to purchase a home, especially if you have a lower credit score and a smaller down payment. FHA loans are a popular choice among home buyers, and they're especially good for first-time home buyers.¹

It’s a good idea to understand how different parts of the loan work. That includes the FHA amendatory clause, also called an “escape clause.” In this context, an escape clause is a way to legally exit a purchase contract on a property without facing a penalty.

The FHA amendatory clause helps give home buyers extra peace of mind that they have an out if negotiations break down after a lower-than-expected appraisal.

The FHA amendatory clause, explained

The FHA amendatory clause, or FHA amendment, enables home buyers using an FHA loan to cancel a purchase and receive a refund of their earnest money if the home appraisal comes in below the agreed-upon price. Essentially, the FHA amendatory clause allows you, the home buyer, to revoke an offer on a home and back out of the sale without any sort of penalty.

The buyer, co-buyer, seller, buyer's agent, and seller's agent must sign the FHA amendatory clause. The FHA will not insure or guarantee the loan if it’s not signed.

When the FHA amendatory clause takes effect

The amendatory clause takes effect when a home appraisal comes in at less than the selling price.

For example, let’s say your offer matches the for-sale price of $250,000. If the appraised value comes in at $225,000, you would have to pay the difference because you cannot get a loan for more than the appraised value.

To bridge the $25,000 gap, you'll either need to get a lower sale price or come up with the cash. You don’t have the money to pay the difference out of pocket, and the seller won’t budge on the sale price. This is when the amendatory clause kicks in and allows you to back out of the sale.

If you still want to go through with the home purchase, you still have options. You can agree in writing to accept a lower price, or negotiate to pay all or a portion of the difference.

Why the FHA amendatory clause form is good for buyers

Appraisals ensure that lenders do not approve a loan for more money than the property is worth while also protecting buyers from overpaying for a property.

The FHA amendatory clause form protects home buyers because they can walk away from a home purchase and get their earnest money deposits back.

This earnest money can entail thousands of dollars. In some states, depending on how the contract is written, the seller may not have to return this deposit if the deal falls through without this protection.

By protecting you from overpaying for a property, the amendatory clause means that you won’t go into homeownership with negative equity. Starting out underwater makes it incredibly hard to refinance or potentially resell the home for a profit later.

When is the FHA amendatory clause not required?

An FHA amendatory clause is not required on certain home purchases, including in the following situations:

• Real estate-owned sales
• FHA 203(k) loans
• Home sales funded by other mortgage investors like Fannie Mae, Freddie Mac, and the U.S. Department of Agriculture Rural Housing Services
• Foreclosure sales
• Sales where the borrower will not become the owner-occupant

The Department of Veterans Affairs (VA) has an escape clause that protects the buyer’s deposit if the appraisal comes back lower than anticipated.²

Other FHA loan disclosures: What is the real estate certification form?

The FHA amendatory clause and real estate certification form often go hand in hand. The real estate certification form states that those signing the sales contract acknowledge the terms and conditions of the sale as laid out in the sales agreement.

The individuals signing must certify to the best of their knowledge that the terms and conditions of the sales contract are true and any other agreement connected to the real estate transaction is part of the sales agreement.

The bottom line: The amendatory clause makes it easier to cancel a home offer after an appraisal

The FHA amendatory clause acts as an important safeguard for borrowers navigating the home buying process. If the appraisal comes back lower than your offer, you can cancel the transaction and safely get your earnest money back.

Signing on the dotted line for a home that appraises below the sales price could result in immediate negative equity and a bad investment. Addendums like this add essential provisions to a purchase agreement to protect both the buyer and the lender.

Are you ready to purchase your own home? Whether you're exploring an FHA loan or another type of loan, start the mortgage approval process today with Rocket Mortgage.

1 Rocket Mortgage is not acting on behalf of FHA or HUD.

2 Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

Rocket Mortgage, LLC, RockLoans Marketplace LLC (d/b/a Rocket Loans), Rocket Close, LLC, and Rocket Money, Inc. are separate operating subsidiaries of Rocket Limited Partnership. Redfin Corporation is an affiliated business. Each company is a separate legal entity operated and managed through its own management and governance structure. Rocket Limited Partnership and Redfin Corporation are wholly owned subsidiaries of Rocket Companies, Inc. (NYSE: RKT).

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.