Using the VA Loan Escape Clause for a Low Appraisal

This guide provides an overview of the “escape clause” contingency for VA home loans that allow borrowers to back out of the deal in a low-appraisal situation.

When you buy a home with a VA loan, the property must be appraised to determine its market value. The appraiser will review the home and recent comparable sales in the area to estimate the current market value.

Home appraisals are required for all VA loans. Mortgage lenders use this process to ensure that they are not lending more than a particular home is worth. However, the requirement itself comes from the Department of Veterans Affairs.

Here’s what you need to know about the VA loan escape clause when buying a home.

What Is the VA Loan Escape Clause?

If you’ve been researching the home buying process lately, you’re probably familiar with the term “contingency.”

A contingency is basically a clause within a real estate purchase contract that allows the home buyer to back out of the deal in certain situations without sacrificing their earnest money deposit.

There are different types of real estate contingencies used by home buyers. For example, a home inspection contingency allows buyers to exit the transaction if the inspection uncovers something they are unwilling to accept.

Similarly, an appraisal contingency gives home buyers a legal exit strategy in cases where the home appraises for an amount that’s less than the purchase price.

And this is where the VA mandatory escape clause comes into the picture.

Definition: The VA loan escape clause (also known as the Amendatory Clause) is a safety net built into VA home loan contracts. It protects borrowers when the house’s appraised value comes in lower than the purchase price.

This means that if the VA appraisal determines that the house isn’t worth what you agreed to pay for it, you have some options. You can renegotiate the price with the seller, cover the difference with cash, or walk away from the deal and get your earnest money deposit back, which we’ll discuss in more detail.

It’s Mandatory for All VA Purchase Loans

With a conventional home loan (one that is not insured or guaranteed by the government), a home buyer can choose whether or not they want to use an appraisal contingency. Many home buyers include them in their contracts for an added layer of protection.

On the other hand, some home buyers choose to limit the number of contingencies they include to make their offers more attractive to the seller. “Waiving contingencies,” as it’s known, is a common strategy in a highly competitive market where multiple buyers are trying to purchase the same home.

With a VA loan, however, the Department of Veterans Affairs requires the escape clause contingency for VA home to be included within the purchase agreement. In other words, it’s a mandatory appraisal contingency that cannot be waived.

Here’s a relevant quote from the VA Home Loan Guaranty Buyer’s Guide:

“The Escape Clause must be contained in the sales contract for all VA-guaranteed loans. Your lender is responsible for ensuring that the paragraph is in the sales contract prior to closing. If the clause is not in the sales contract, VA may not guaranty the loan.”

As you can see, the rules and requirements for the VA loan escape clause are clear and straightforward. All home buyers who use a VA-backed mortgage loan to purchase a house must include this contingency clause within their contracts.

What Happens During a Low Appraisal?

To reiterate, a “low appraisal” situation occurs when a buyer agrees to pay a certain price for a home, only to find out that it later appraises for a lesser amount. In other words, the property appraises below the agreed-upon purchase price.

VA home loan buyers have several options as to how they want to proceed in a low appraisal situation.

1. Renegotiate the Price: The buyer could negotiate with the seller to lower the purchase price to match the appraised value. This approach allows the transaction to proceed without needing additional funds from the buyer.
2. Pay the Difference: The buyer can choose to pay the difference between the appraised value and the finalized sale price in cash. Lenders will only extend a loan that is in line with the current market value of the home. In this case, you would need to bridge that gap and bring more money to the closing table.
3. Request a Reappraisal: In some cases, home buyers may request a reappraisal of the property if they believe the initial appraisal was inaccurate or incomplete. The VA refers to this as a Reconsideration of Value, or ROV. But there is no guarantee that the reappraisal will result in a higher valuation. Further, the buyer should understand that a second appraisal will come at an additional cost.
4. Walk Away: If the seller is unwilling to lower the purchase price, and the buyer cannot afford to cover the shortfall or secure additional financing, the buyer can utilize the VA escape clause to walk away from the deal. In this scenario, the earnest money deposit will be returned to the buyer, as long as the escape clause is written into the contract.

Without the escape clause (or a similar appraisal contingency), a home buyer who backs out due to a low appraisal would risk losing their earnest money deposit. And that could mean the loss of thousands of dollars.

So, while it might make your contract a bit more “rigid,” the VA loan escape clause also gives you an important safety net for situations that are beyond your control. It gives you a legal way to back out of a real estate transaction if the home is determined to be worth less than what the seller wants you to pay for it.

Need VA Loan Financing?

If you’re eligible for a VA home loan to buy a home, be sure to work with a team of mortgage specialists with experience with these types of loans. Reach out to Sammamish Mortgage to get the process started!