What Homebuyers and Sellers Should Know About the VA Amendatory Clause?

The Amendatory Clause is important when a VA home loan is used in the real estate transaction. It provides veterans, active duty service members and surviving spouses the protection of not overpaying for a particular property. If you’re purchasing a home with a VA loan, you’ll need to know more about a VA loan clause for a seamless purchase process.

What is the VA Amendatory Clause?

The VA Amendatory Clause is a required document for real estate transactions involving a VA loan, as mandated by the Department of Veterans Affairs (VA). This clause ensures that if the home is appraised for less than the agreed upon purchase price, the buyer is not forced to buy the home this protects the buyer.

This prevents veterans from overpaying for a property and from being financially encumbered by a home that has less value than the contact price.

Purpose of the VA Amendatory Clause

The VA Amendatory Clause primary purpose is to protect VA loan borrowers from financial risk. It accomplishes this in two main ways:

• Avoids Overpayment: The clause prevents buyers from paying more for a home than its true market value as determined by a VA appraisal.
• Allows Buyer to back out: if the appraisal is lower than the contracted price, the buyer can walk away from the purchase with no penalty (unless the seller agrees to reduce the price or the buyer pays the difference out of pocket).

How Does the VA Amendatory Clause Work?

Here’s how the VA Amendatory Clause works in a real estate transaction:

1. Inclusion in Purchase Agreements: This clause is automatically part of all VA-backed home loan purchase contracts. It has to be signed by both the buyer and seller.
2. VA Appraisal Conducted: The lender orders a VA appraisal in order to establish the fair market value of the home. The appraiser assesses the home’s condition and recent comparative sales in the area.
3. Appraisal Value Report: The appraisal information is submitted to the lender, with how much the home is worth.
4. Comparison with Sale Price: If the appraised value is equal or greater than the sale price, the loan moves forward as anticipated. But if the value is less than the agreed price, that’s when the clause kicks in.
5. The buyer’s options: if he or she has a low appraisal, they have a number of options:
6. Negotiate a Lower Price: A buyer can ask a seller to lower the sale price to equal the appraised value.
7. The buyer pays the difference in cash (this amount cannot be included in the loan).
8. Use the VA’s Reconsideration of Value (ROV): If the buyer feels the appraisal is wrong, they can ask for the appraisal to be reviewed.
9. Walk Away: If the seller is unwilling to reduce the sale price and the buyer is unwilling to pay the difference, the buyer may terminate the contract without losing any earnest money deposit.

The VA Amendatory Clause, Who will Signs It?

Before the sale gets finalized, the buyer, seller and sometimes the real estate agents must sign the VA Amendatory Clause. This document typically comes as part of the purchase agreement package and is given to the lender.

Exclusions from the VA Amendatory Clause

The VA does not have an amendatory clause in some cases. These exceptions include:

• Refinance Loans: The clause is limited to purchase loans, not refinances.
• VA Foreclosures & Short Sales: If a home is for sale via a VA foreclosure or short sale, the clause might not be necessary.
• Buyer and Seller Are the Same Entity: If the buyer is buying the home from an employer, builder or Relocation Company, the clause could be waived.

What if the VA Appraisal Comes in Low?

If the VA appraisal is lower than the purchase price, the buyer has a number of options:

1. Negotiate with the Seller: A lot of sellers will lower the price to match appraised value or work with a VA buyer.
2. Pay the Difference:  If the buyer has additional cash, they can pay the difference between the appraised value and the agreed sale price.
3. Request a Reconsideration of Value (ROV): If either the buyer or lender feels that the appraisal is inaccurate, they can submit additional comps to support their request for a higher value.
4. Walk Away From the Deal: If the parties cannot reach an agreement, the buyer can legally back out of the purchase without incurring a penalty.

Common Myths about the VA Amendatory Clause

There are quite a few misconceptions owners and buyers have on the VA Amendatory Clause that can lead to a lot of confusion. Here are a few common myths:

• Myth 1: The clause benefits the seller:  In actuality, the clause benefits the buyer by ensuring that he or she does not overpay for a home.
• Myth 2: The Seller Has to Take Less: Most sellers choose to accept the appraised value, but no one is forced to.
• Myth 3: VA Loans Take Longer to Close Because of This Clause: VA loans close at nearly the same percentage of the time as conventional loans, and this clause is only a safeguard.

Benefits of the VA Amendatory Clause for Buyers

The VA Amendatory Clause offers multiple benefits to the borrowers of a VA home loan:

• Avoids Overpaying: Buyers know they aren’t overpaying for a home.
• No Financial Risk: If the appraisal comes in low, the buyer can walk away from the deal with no financial ramifications.
• Promotes Fair Pricing: Sellers are encouraged to list their homes realistically according to market value.
• More Room for Negotiation:  Buyers can leverage the appraisal report to obtain a better offer.

How Sellers Can Prepare for the VA Amendatory Clause

For sellers, the VA Amendatory Clause means they can expect potential appraisal problems. Here are a few tips:

• Set A Realistic Price On The Home: Investigate with comparable properties to see what they are selling for and shoot a competitive price.
• Get ready for the VA Appraisal: Make sure the house is in working order as VA appraisers also evaluate property safety.
• Be Willing to Negotiate: If the appraisal is low, you can reduce the price to move the sale forward.

Final Thoughts

When buying a property with VA loans, the VA Amendatory Clause is a significant protection for the homebuyer. It protects them against overpaying by making sure that veterans and service members pay fair market value when they buy homes. This clause might call for extra negotiations, but ultimately it is to the benefit of both buyers and sellers as it will ensure fair pricing and realistic values for homes.

So, if you are looking for your new home with a VA Loan, knowing this clause can help you make informed decisions and get yourself a good deal on your new home.