What does the FHA amendatory clause mean?
What are the requirements to get an FHA loan?
How does it work?
In this article, we will break down the notion of “FHA amendatory clause”, so you know all there is to know about it!
We will look at what is an FHA amendatory clause, its definition, its objective and benefits, the FHA disclosures amendatory clause form, when must the FHA amendatory clause be signed, how is the clause worded, what is the real estate certification, and more!
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What is FHA amendatory clause
The FHA amendatory clause (also known as just the amendatory clause) is a legal document signed by parties to a real estate transaction along with their real estate agents or broker agreeing that the buyer can get out of the deal of the property is appraised for less than the sales price.
In other words, it’s a legal provision intended to protect the FHA so that it insures home loans for values below the market value and to protect the buyer having the chance to back out of the home purchase, without any penalties, if the appraised value is below the sales price.
The FHA is a government-sponsored entity in the United States tasked to promote homeownership by insuring mortgages and lenders against potential homeowner mortgage payment defaults or foreclosures.
Over half of the mortgages in the United States are insured by FHA.
The FHA’s mission is to allow individuals with a lower credit score or first time home buyers to be able to get the necessary funding by securing the lender’s loan against possible events of default.
The Federal Housing Administration (FHA), part of the United States Department of Housing and Urban Development), will not guarantee mortgages for a value higher than the property’s appraised value.
With the FHA backing a loan, lenders will potentially lend up to 96.5% of the property’s appraised value.
Fundamentally, the amendatory clause is intended to protect the FHA.
In this context, to allow new home buyers, people with lower credit scores and insure lenders for home and property loans, the FHA must ensure that it does not give loan guarantees for values higher than the actual home value.
The agency does not want to be stuck with additional debt on its hands when a homeowner goes into default where the property’s value does not even cover the outstanding mortgage.
In case of repossessions, foreclosures, or defaults, the FHA wants to make sure that the home can always be sold for a price, allowing it to fully cover the property’s outstanding loan.
Amendatory clause definition
How do you define an FHA amendatory clause?
What is the definition of FHA amendatory clause?
The FHA amendatory clause is a legally binding statement between the parties to a real estate transaction along with their real estate brokers or agents whereby the parties agree that the buyer can elect not to pursue the transaction if the appraisal value is below the sales price.
In other words, the amendatory clause is a legally binding statement made by all parties to a real estate transaction where the buyer is given the right to opt-out of a deal in case the real estate property is appraised below the sales price.
A real estate purchase can also elect to proceed with the transaction provided that he or she financially assumes the difference between the sales price and the appraised value.
FHA amendatory clause benefits
Purchasing a property where FHA backs the mortgage provides many benefits to the buyers such as:
- Ability to make lower cash down payment
- Ability to get approved for a mortgage with lower credit scores
- Have more chances of finding home purchase financing
The FHA mortgages also benefit sellers perhaps in a more indirect fashion in the following manner:
- With more buyers potentially able to purchase a home, they can have a larger market of potential buyers
- They can sell their home to individuals who would have otherwise not been qualified for financing
FHA loan requirement
To get an FHA loan, you’ll need to observe many requirements.
Here are some FHA mortgage requirements that you should keep in mind:
- You can have a lower credit score to be approved but credit scores lower than 500 may not qualify
- If your credit score permits, you can qualify to deposit as low as 3.5% of the appraisal value as a cash down payment
- You may need to get mortgage insurance to protect against any future risk (you can get an upfront mortgage insurance premium or an ongoing mortgage insurance premium)
- The amendatory clause must be signed before the property appraisal is done
- The amendatory clause must be signed by all parties including their real estate agents
Amendatory clause objective
What is the legal consequence of having an amendatory provision?
What happens when the FHA purchase agreement addendum is triggered?
Here is what can happen following the execution of an FHA addendum form:
- The appraisal is above the sales price
- The appraisal is below the sales price
If the appraisal shows that the property’s market value is above the sales price, then the buyer can complete the transaction and the FHA will continue its file assessment as expected.
However, if the appraisal reveals a property market value below the sales price, then the buyer has two options:
- Cancel the accepted offer to purchase without any financial penalties
- Continue with the purchase by directly paying the difference between the sales price and the appraised value
Essentially, when the parties to a real estate transaction sign the amendatory clause, they are agreeing that the buyer has the right to call off the deal or back out if the home appraisal is below the sales price and he does not have the means or willingness to pay the difference.
John has an accepted offer to buy a property for $300,000.
However, the home appraisal reveals that the property is only worth $250,000.
Leveraging the FHA clause, John can cancel the deal without any financial penalty and get his earnest money back.
In the end, the benefits of the FHA addendums go to the FHA and the home buyers.
Who must sign the amendatory clause
Who should sign the amendatory clause?
Do sellers have to sign the FHA amendatory clause?
Generally, all parties to the transaction (including the real estate agents) will need to sign the amendatory clause before the home appraisal is done.
- The buyer
- Any co-buyer
- The seller
- The buyer’s agent (if any)
- The listing agent (seller’s agent)
In some cases, the FHA addendum is signed separately from the promise to purchase using an FHA amendatory clause form whereas in other cases the FHA disclosure is directly built into the sales contract (also referred to as the FHA purchase agreement).
Further to the amendatory clause, all parties agree that should the appraisal reveal that the property’s market value is below the agreed sales price, the buyer has the right to cancel the transaction and get out of the deal.
This protects both the buyer and FHA.
In essence, the buyers are protected as they have the ability to get out of a real estate transaction where the value of the property was not consistent with the market value.
This helps prevent buyers from buying property based on emotion or potentially getting into a deal over and above their means.
The FHA is also protected as they are insuring home loans for a value below the property market value.
When is an FHA addendum not required
In what case is the FHA addendum will not apply?
When a homebuyer does not intend to use the property as their primary residence (owner-occupant), the FHA amendatory statement will not apply.
Also, the FHA amendatory clause will not apply when:
- Fannie Mae is involved
- Freddie Mac is involved
- Rural Housing Services is involved
- For HUD REO sales
- When the Departement of Veteran Affairs is involved
- When a seller is selling an REO asset
- Relating to foreclosure sales
How is the FHA amendatory clause drafted
What does the amendatory clause form look like?
What’s contained in the FHA loan addendum?
The FHA amendatory clause is a statement where the parties agree and acknowledge that notwithstanding any other terms of the sales contract, the purchaser has no obligation to complete the transaction if the appraised value of the home is below the sales price.
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 seller has delivered to the purchaser a written statement issued by the Federal Housing Commissioner setting forth the appraised value of the property (excluding closing costs) of not less than $ which statement the seller hereby agrees to deliver to the purchaser promptly after such appraised value statement is made available to the seller. The purchaser shall, however, have the privilege and option of proceeding with the consummation of the contract without regard to the amount of the appraised valuation made by the Federal Housing Commissioner. The appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure. HUD does not warrant the value or the condition of the property. The purchaser should satisfy himself/herself that the price and the condition of the property are acceptable.
What is the FHA real estate certification
Why is there a real estate certification required in an FHA amendatory clause form?
How do you fill out an FHA addendum?
In the FHA amendatory clause form, you have two parts:
- The actual FHA amendatory clause
- The FHA real estate certification
The buyer and seller sign the first part of the FHA addendum (amendatory clause).
The second part (real estate certification) is signed by the buyer, seller, listing agent and selling agent, if any are involved.
The real estate certification objective is to ensure that the buyer and seller disclose the true and correct information about their sales price.
In essence, the FHA’s objective is to avoid buyers, sellers and their real estate agent to come up with side agreements to circumvent the purpose of the amendatory clause.
With the real estate certification, all parties certify that the terms and conditions of the sales contract are true and accurate and, according to their knowledge, there are no other agreements between the parties related to the purchase of the property in question.
FHA loan addendum criticism
Many sellers are reluctant to sign an FHA addendum form as the process can reveal that the property is being sold for more than its fair market value and the buyer can potentially back out of a good deal.
This position is not entirely false.
Sellers aspire to sell their property for the best possible price so long as someone is ready and willing to pay for it.
On the flip side, the FHA will not stay in the business of guaranteeing loans for long if buyers were buying based on speculation or for values not supported by the market conditions.
We must also recognize that with the FHA supporting bank loans, sellers can tap into a larger pool of eligible candidates (even those who are first time home buyers or have lower credit scores).
This can help increase a seller’s chance of being able to sell his or her property.
The higher demand can also help increase the appraisal value, which will benefit the sellers.
Industry reports indicate that more than 50% of mortgages issued to buyers in the U.S. are FHA mortgages.
In other words, sellers who feel that they cannot sell their property at their choosing price will potentially lose 50% of potential candidates.
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