VA requirements

The VA Loan Escape Clause: A Reader Question

January 23, 2015

The VA Loan Escape Clause: A Reader Question

084-logoA reader asks, “If an appraisal comes back lower than the contracted price, is the seller required to sign documentation allowing the buyer to cancel the contract?”

Borrowers cannot, under the rules and regulations of the VA loan program, be forced to purchase a home when the appraised value of that property is lower than the sale price. Why? Because in such cases, the difference between the asking price and the appraised value of the home must be paid in cash by the borrower–it cannot be financed.

The VA will not allow the borrower to be forced to accept such terms — the borrower is free to accept the sale price and pay the difference out of pocket, but he or she cannot be required to do so.

The Department of Veterans Affairs official site has a sample VA loan escape clause that is downloadable as a .pdf file. It 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 purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs. (Authority: 38 U.S.C. 501, 3703(c)(1))”

This clause is in effect regardless of whether or not the purchase agreement specifically mentions it. Borrowers and sellers who need assistance with the VA loan escape clause or how it works should contact the VA directly at 1-800 827-1000.

4 Comments
  1. Evan

    I'm trying to buy a HUD home right now with a VA loan, and the Escape Clause was not in the initial sales contract, but the seller refuses to sign the amendatory Escape Clause. This means that my lender can't proceed. Can the seller refuse to sign the amendatory clause required by VA? This seems to place an undue hardship on buyers seeking to use a VA loan, and it seems especially strange that it's a HUD home and the seller is presenting a roadblock to a VA loan purchase. Any help is appreciated.

    • Joe Wallace

      The escape clause is mandatory regardless of whether it is included in the contract or not.

  2. Mary

    We are trying to buy a HUD REO property and the asset management company won't sign the escape clause. The lender thinks it is necessary for the VA to underwrite the loan, but is it? I know HUD doesn't need to for their own regulations, but can the VA loan continue without the clause? Please answer ASAP!

    • Joe Wallace

      The VA Escape clause is an amendatory clause that is required to be recognized regardless of whether it's in the paperwork or not--contact the VA directly for assistance in this matter by calling 1-800 827-1000. The Escape Clause is required.

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