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.
Beth Pihl
In a case where Buyer, Seller and both Agennts agree that the Notice of Value is unreasonably low, how do they go about challenging the Notice of Value?
Joe Wallace
Hi Beth, thanks for asking. Here's the straight scoop from the VA official site: "1. What if I don't agree with the value on the appraisal or NOV? Any party of interest to the transaction can submit a request (written) through the lender to the fee appraiser on whose appraisal the current VA valuation is based, for a reconsideration of value. Requests other than to change value will be submitted through the lender to the VA office of jurisdiction. Although there is no requirement that comparable sales or other real estate market information be submitted with a request for a change in value, such supporting information will greatly assist the VA in reviewing the request. Lender Appraisal Processing Program (LAPP) cases should also include a recommendation by the Staff Appraisal Reviewer (SAR)."
susan
if im the seller,and the va value after the appraisal is lower than what im asking do i have any right to refuse the sale with this buyer or not? what options do i have if i want to cancel the sale at this moment. the va just appraised my house last tuesday. please help me asap. thanks
Joe Wallace
Hi Susan, thanks for your question. Have you signed any binding agreements to sell the property yet? If not, you're not obligated to continue the sale of the property, and you'd be free to negotiate with the buyer as well--the VA allows a loan on the property when the borrower agrees to cover the difference between the sale price and the appraisal value out-of-pocket. If you have signed a purchase agreement or other legally binding commitment to sell, best advice is to speak to a lawyer experienced in real estate law to learn what your options might be.
Jeanne
I am a seller. What are my rights if I am NOT comfortable signing the escape clause? On my particular document, it states that the buyers can walk for whatever reason if the VA does not give them the document stating that the home appraised at the full buying price. No ONE will tell us what it appraised at, so we're in this totally blind. We are giving them HUGE concession money, now they also want us to sign another document stating that we're leaving them the patio furniture as a "gift" I just read up on that, the concession money we are giving them is 5% of the homes price, so that puts them OVER what VA normally allows. We have jumped through hoops for them and now this? I DO NOT want to sign this document, what are MY rights as the seller?
Joe Wallace
The VA requires, as a condition of loan approval, the VA loan escape clause. It must be added to any contract that does not contain it originally. The added concessions you mentioned are not required as part of the escape clause and could be re-negotiated, but the VA loan escape clause itself is non-negotiable. If you've signed legally binding agreements to sell the property, it might be best to consult a lawyer about your options. If you aren't legally obligated by contract, you can always try renegotiating the terms of sale with regard to the concessions.
ray barnes
I am a veteran that gave a 1,000 dollar earnest depost i have changed my mind on buying this property am i obligated can i get my money back please respond asap
Joe Wallace
That may depend on the circumstances--if you are changing your mind on a property that appraised lower than the sale price, the seller and lender cannot penalize you in any way for cancelling the deal. However, if you have committed in writing to the purchase and the sale price does not exceed the appraised value, you may be liable for certain fees and expenses paid for services rendered. Whether you are liable for the earnest money in your particular case (aside from what's already been reviewed here) may depend on the terms of your written agreement with the seller.
CONFI
I am about to close Escrow and I am having a hard time signing the papers. To make a long story short Yes we agreed to purchase the property above th Apprasal price and Yes we could have walked away but we did not. We removed the apprisal contingency and here we are. I just cannot go through with it so my question is can I use this VA escape Clause to cancel the contract because I did not see this clause in the orginal contract we signed so since this Clause was not present can I use this to get out of the mess we got ourselves in and get the 20K earnest money?
Joe Wallace
Contact the lender and the VA directly at 1-800 827-1000 for assistance in this matter.
Derrick Brotherton
When entering/signing a sales contract to purchase a home using a VA loan entitlement, can the seller alter or modify the VA escape clause within the sales contract? For example, can the seller alter the VA escape clause to require the veteran purchaser to incur a penalty by forfeiting the deposit or earnest money if the contract price exceeds the reasonable value (NOV) of the property established by the VA? If not, is the contract valid or binding under a VA loan contingency?
Joe Wallace
No one may alter the VA loan escape clause to mean something different than the VA intended, which is that, as per the VA official site, "If the sales contract was signed by the veteran prior to receipt of the Notice of Value (NOV), the contract must include, or be amended to include, the clause below. '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.'" If you are having problems with the escape clause being honored, contact the VA Regional Loan Center with jurisdiction over your area--find yours at http://www.benefits.va.gov/homeloans/contact_rlc_info.asp