How the FHA Amendatory Clause Works in WA State

If you buy a home in the state of Washington using an FHA loan, you may be wondering how the FHA amendatory clause works in WA State. When purchasing a home in Washington, you must most likely sign an FHA amendatory clause. The seller will have to sign it as well.

This clause is sometimes written directly into the purchase agreement or real estate contract. Other times, it might be attached as an addendum to the contract. But in either case, it serves the same purpose.

This document gives the home buyer extra protection by allowing them to back out of the deal if the home appraises below the purchase price. But it also allows the buyer to proceed with the deal, even with a low appraisal.

In Washington, the FHA amendatory clause is one of the most important documents you will sign when using an FHA loan to buy a house. So it’s essential to understand what it is, how it works, and what it does for you as a home buyer.

What Is an FHA Amendatory Clause?

The FHA amendatory clause is a disclosure statement that protects borrowers who are using an FHA loan to purchase a home. It states that the buyer is not obligated to complete the purchase of the property if the appraised value of the home is lower than the agreed-upon sales price.

In other words, if the appraisal comes in low, the home buyer can back out and receive a refund of their earnest money deposit.

Definition: A home appraisal is an unbiased professional assessment of a property’s fair market value, conducted by a licensed appraiser. Nearly all purchase loans require a home appraisal. That includes FHA, VA, and conventional loans.

In Washington, the FHA amendatory clause tends to generate confusion among home buyers and sellers alike. This is partly due to its vague and generic name.

The “amendatory” label suggests that this clause gets amended or added to the contract. And that’s true. But in reality, it serves a specific purpose relating to the home appraisal.

What Does It Do and Who Does It Protect?

The FHA amendatory clause protects both the buyer and lender from getting stuck with a property worth less than the agreed-upon price.

From a borrower’s standpoint, the amendatory clause provides valuable protection. It gives them peace of mind that they can back out of the sale if the appraisal comes in low. This can help prevent buyers from overpaying for a home or experiencing some kind of financial hardship.

What Does the Amendatory Clause Actually Say?

In the state of Washington, the FHA amendatory clause includes standard boilerplate language that simply requires the buyer to fill in a dollar amount.

While the exact wording can vary, it usually looks something like this:

It is expressly agreed that notwithstanding any other provisions of this contract, the purchaser shall not be obligated to complete the purchase of the property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise unless the purchaser has been given in accordance with HUD/FHA or VA requirements a written statement by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement lender setting forth the appraised value of the property of not less than $________. The purchaser shall have the privilege and option of proceeding with the consummation of the contract without regard to the amount of the appraised valuation.

In most cases, the home buyer/borrower would fill in the dollar amount with the purchase price they agreed to pay.

Can the Buyer Remove It From the Contract?

With a conventional mortgage loan (not backed by the government), the home buyer can choose whether or not they want to include these contingencies. A home buyer might waive all contingencies in a competitive real estate market to make their offer more attractive.

However, the amendatory clause is required for all FHA home loans in WA State. The Federal Housing Administration, part of HUD, requires this clause to protect borrowers from overpaying for a property. It also protects FHA home lenders by limiting loan amounts so lenders don’t risk getting involved in bad investments.

If a buyer were to waive the FHA amendatory clause, they would be giving up their right to back out of the sale if the home’s appraised value is lower than the sale price. This could put the buyer at risk of overpaying for the property and facing financial hardship.

What if the Appraisal Comes in Low?

If the appraised value of a home is lower than the agreed-upon purchase price, a home buyer using an FHA loan in WA State has the following options:

1. Negotiate a lower purchase price with the seller.

The buyer can approach the seller and discuss the possibility of reducing the purchase price to match the appraised value. This scenario involves some compromise and negotiations between the buyer and seller. Suppose the buyer can prove that the home is worth less than what was initially agreed upon based on a professional appraisal. In that case, the buyer has some negotiating power regarding lowering the price.

2. Terminate the contract and recover the earnest money.

The buyer can terminate the purchase contract without penalty and receive a full refund of their earnest money deposit. This option allows the buyer to leave the deal if they are uncomfortable paying more than the appraised value.

3. Proceed with the purchase at the original price.

If the buyer is willing to accept the lower appraised value, they can proceed with the purchase at the originally agreed-upon price. This option is less common, as buyers typically prefer to pay the fair market value for a property.

Buyers who continue with a real estate transaction to pay more for a home than what it is worth according to current market conditions are taking a risk. Lenders will only agree to provide a loan amount based on the home’s appraised value. The buyer will need to pay the difference out of pocket.

Have questions? Sammamish Mortgage serves home buyers and homeowners across the state of Washington and the broader Pacific Northwest. We offer a wide range of financing options including FHA, VA and conventional loans. Please contact us with your mortgage questions!