What is the FHA amendatory clause?

The FHA amendatory clause is a required addendum to FHA-insured home purchase contracts that lets buyers cancel if the appraisal is lower than the agreed-upon price, with their earnest money refunded.¹ Sometimes referred to as an “escape clause,” the amendatory clause is unwaivable, protects you from overpaying, and gives you options to renegotiate or cover an appraisal gap.

Key takeaways:

• The FHA amendatory clause is a required addendum to the purchase and sale contract that lets buyers walk away from a home purchase without losing their earnest money if the appraisal comes in lower than the agreed-upon sales price.
• The clause must be signed by the buyer and seller prior to closing, and cannot be waived.
• If an appraisal comes in low, buyers can walk away penalty-free, negotiate a price reduction with the seller, or choose to pay the cash difference out of pocket.

Why is the FHA amendatory clause required?

HUD requires the amendatory clause in a mortgage to protect both the borrower and the lender.

Because FHA maximum loan amounts are calculated based on the lesser of the sales price or the appraised value, the lender cannot approve a loan that exceeds the home's appraised market value.

The clause ensures that home buyers are not forced into an unmanageable financial position or compelled to overpay for a property if an appraisal gap occurs.

When the FHA amendatory clause takes effect

The amendatory clause takes effect when an FHA home appraisal comes in for less than the selling price.

Note that while the appraisal establishes market value, the property also must meet HUD's FHA minimum property standards to qualify for financing.

For example, say your offer matches the for-sale price of $300,000. If the appraised value comes in at $285,000, you would have to pay the $15,000 difference out of pocket because you cannot get an FHA loan for more than the appraised value.

To bridge the $15,000 gap, you'll either need to negotiate a lower sale price or come up with the cash. If 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 while recovering your earnest money.

If you still want to go through with the home purchase after a low appraisal, you still have options:

• Negotiate a price drop. Ask the seller to reduce the sales price to match the appraised value.
• Cover the appraisal gap. Choose to pay all or a portion of the difference between the sales price and appraised value in cash at closing.
• Cancel the transaction. Exercise your right under the clause to walk away with your full earnest money deposit intact.

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 back.

By protecting you from overpaying for a property, the amendatory clause means that you won’t go into homeownership with negative equity. Starting with an underwater mortgage 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 required on most FHA purchase transactions. However, per HUD guidelines, it is not required on certain home purchases, including:

• Real estate-owned (REO) sales directly from HUD
• FHA 203(k) rehabilitation loans
• Sales where the seller is a government agency (such as Fannie Mae, Freddie Mac, the VA, or USDA)
• Foreclosure sales or sales by a lender disposing of REO assets
• Sales where the borrower will not become the owner-occupant (such as sales to nonprofit agencies)

The Department of Veterans Affairs (VA) has a similar escape clause that protects a veteran 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 and are frequently included on the same document. 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 that any other agreement connected to the real estate transaction is part of the sales agreement.

FAQ

Here are answers to common questions about the FHA amendatory clause.

What is the amendatory clause in a mortgage?

An amendatory clause is a specific contract addendum required by government-backed mortgage programs (like FHA loans and VA loans). It mandates that the borrower cannot be forced to complete a purchase or forfeit earnest money if the appraisal falls short of the purchase price.

Can a buyer waive the FHA amendatory clause?

No. HUD guidelines prohibit buyers from waiving the FHA amendatory clause protection, even in competitive seller's markets.

Does a low FHA appraisal force the buyer to cancel?

No. A low appraisal gives the buyer the option to cancel without penalty, but the buyer can still choose to negotiate a lower price or pay the remaining appraisal gap out of pocket.

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. Addenda 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 option, review the step-by-step FHA loan process and 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.

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