What is an FHA Amendatory Clause?

Using a government-backed mortgage loan comes with certain protections. With FHA loans, that includes the FHA amendatory clause, which allows you to back out of a home purchase if the property doesn’t appraise for what you’ve offered for it.

This clause, sometimes referred to as an escape clause, protects you from having to cover any difference between the appraised price and your offer out of pocket and, even better, prevents you from unnecessarily overpaying for your home.

It’s also a protection unique to FHA and VA loans (another type of government-backed loan). With conventional loans, you’d need to include certain contingencies in your sales contract to get this kind of safeguard.

The FHA Real Estate Certification Clause

FHA loans also come with another important clause: the certification clause. This goes hand in hand with the amendatory clause and, once signed, proves that all parties — buyer, seller, and any real estate agents — acknowledge and agree to all the terms and conditions of the sales contract.

This clause is vital to ensuring transparency and compliance in FHA loans and ensures that all parties must adhere to the amendatory clause, among other terms and conditions, should it be necessary.

How the FHA Amendatory Clause Works

If you’re entering a transaction involving an FHA loan, you must sign the amendatory clause before signing the FHA appraisal is ordered. This ensures all parties acknowledge the provisions of the clause before the next steps of the sale can go into effect.

Once the contract is signed and the lender begins processing the buyer’s loan application, they will order an appraisal of the property to confirm its value. Should the appraised value come in at or higher than the buyer’s offered price, then the transaction moves forward as planned.

If the appraised value comes in lower than the offer price, though, the amendatory clause kicks in and gives the buyer a choice: Either back out of the sale unscathed and start the home search over again, or agree in writing to accept the lower value, which caps the max loan amount. This would mean paying the difference out of pocket or negotiating some other deal with the seller (maybe splitting the difference, for example).

Common Example

Here’s how this could look in a real-life scenario: Say you put in an offer for a home for $400,000. The seller accepts, and you both sign the amendatory clause and sales contract. Your lender then orders an appraisal, only to find out the home’s market value is just $380,000.

If you didn’t have the extra $20,000 to cover the difference, you could use the amendatory clause to leave the transaction and get your earnest money back in the process.

If you did have the cash to cover the difference or you were able to negotiate with the seller to potentially split it, your contract would be amended as necessary, and your deal could continue moving forward.

Is the FHA amendatory clause required?

The amendatory clause is a required clause in any FHA loan contract and is included to protect buyers from paying more for a home than it is worth.

If you plan to use an FHA loan for your home purchase or sell your home to a buyer using an FHA loan the amendatory clause will be a key piece of the puzzle. Talk to your agent or loan officer if you’re not sure how the amendatory clause could impact your home purchase or sale.

When does the clause need to be signed?

All parties: buyer, seller, and any real estate agents involved, need to sign the amendatory clause prior to ordering the appraisal. This ensures the protection is in effect before the buyer is legally on the hook for the purchase.

Is the amendatory clause bad for sellers?

The amendatory clause isn’t necessarily bad for sellers, but it can result in losing a potential sale in some situations. If a seller isn’t willing to negotiate when an appraisal comes in low, for example, the buyer may back out using the amendatory clause. This would mean relisting the home and starting the entire marketing/sales process — and sales timeline — all over again.

There’s also the chance that the amendatory clause skews the offer-vetting process for sellers. For instance, with its protection in place, FHA buyers may be more willing to offer higher-than-average offers that can be tempting to sellers. However, once the appraisal comes in, the home may not be valued that high, preventing the deal from actually going through.

Despite all this, the amendatory clause, at its core, provides valuable protection. It fosters trust and transparency in FHA transactions and ensures that FHA borrowers—many of whom are first-time buyers or buyers with low to moderate incomes—aren’t forced to overpay for properties.

And as long as all parties go into the transaction understanding the clause — and with a good idea of what a home’s potential market value is (your agent can help you here), a profitable and beneficial deal is still possible, no matter what side of the translation you’re on.