What is the VA Loan Escape Clause?
There are many different ways to buy a home using a VA mortgage loan. Sometimes the buyer finds a home they really want, work with the seller to come to an agreed-upon price and other terms, and then agree in writing to the purchase of the home.
But what happens if all this occurs prior to the property being appraised by a VA-approved professional and establishing the fair market value of the home?
The rules of VA mortgages include a stipulation that the VA will guaranty a home loan for the appraised value as listed on the Notice of Valuation, or NOV.
If the seller’s price is higher than that amount, it’s up to the buyer to come up with the rest–the VA won’t insure a loan for an amount higher than the NOV (plus approved extras like energy-efficient improvements and other items the VA allows to be built into the loan amount).
Is the buyer stuck buying a property in this case if they decide they don’t want to pay the extra money above and beyond the fair market value of the home?
No. The VA has an escape clause built into the purchase process to protect buyers in just these instances. The escape clause states:
“It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise or be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs.”
The escape clause must be added to any contract between a VA borrower and seller if the clause is not there already–VA regulations require it as a condition of doing business.
About Joe Wallace
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association.