The VA Amendatory Escape Clause And Its Effects

If you’re not aware of the VA Amendatory Escape Clause, it’s something you should definitely be aware of. While the VA escape clause can be a big pain point for the seller, the seller’s reaction can cause significant consternation to the borrower, to the extent that the seller may refuse to sell the home. As a VA loan borrower, it is very wise to know exactly what the VA escape clause entails and to do your part to let the seller know ahead of time that the Escape Clause is coming and what it means.

 

What Is the VA Loan Escape Clause?

So what is the VA amendatory escape clause? Well, the official VA language of the Escape Clause is as follows: “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.” See a sample of the VA escape clause pdf provided by VA.gov

In plain English, the VA amendatory escape clause form means if the home’s selling price is higher than the VA appraisal determines to be the reasonable value of the home, the borrower can walk even if they have already signed a contract to purchase the home. To understand this provision fully, it is important to review the VA loan process. A home buyer applies and gets pre-approved for a VA loan at a certain amount. Using that knowledge, they begin hunting for a home. A suitable home is found, the buyer makes an offer, and the offer is accepted (if only it was really that simple, right?). Then comes all the paperwork, both things that are common among all loan types and those that are VA loan specific. One of the VA loan specific hoops to jump through is the VA appraisal, conducted by an official appraiser. One of the purposes of the VA appraisal is to determine the actual value of the home. After the appraisal, the VA will issue a Notice of Valuation (NOV) that states what the VA deems is the fair market value of the property. There’s just one tiny, little, minuscule issue here; this appraisal definitely takes place after the offer has been accepted and probably after a contract has been signed by seller and buyer for the agreed upon amount.

 

What Are My Rights If I Am Not Comfortable Signing the VA Loan Escape Clause?

Why is this an issue? Because the VA absolutely will not guarantee a loan amount that is higher than what the NOV states are the fair market value. So . . . what if the buyer has already agreed to pay a certain amount that is higher than the VA is willing to guarantee? Enter Escape Clause. Once the NOV comes in, if the “fair market value” as determined by the VA is lower than the selling price, the buyer can still back out, or they can opt to pay the price and just have a portion of the loan not be guaranteed by the VA. Since many borrowers can’t afford to pay these extra expenses themselves without VA guarantee, the Escape Clause prevents them from being forced into this situation.

 

Why is the VA Loan Escape Clause Required?

The VA loan escape clause is mandatory as it protects the buyer that qualifies for a VA loan from being locked into a sale if the VA home appraisal comes back at a lesser value than the agreed upon price by the buyer and seller. It also protects the buyer from any penalties or fees for backing out of the sale. The Department of Veteran Affairs includes the VA loan escape clause because they will not offer a loan for an amount greater than what they appraise the property to be.

 

Is the VA Loan Escape Clause Negotiable?

What is more, the Escape Clause is non-negotiable and the VA Escape Clause form must be included in every VA sales contract. If the VA escape clause disclosure is not included in the Department of Veterans Affairs residential purchase and sale agreement, the clause must be amended. In a lot of ways, this throws the seller under the bus, especially if the seller was not aware of the Escape Clause. Sellers often make important life decisions after the contract to sell their home for a certain amount is signed (since, you know, signing a contract usually establishes a legal obligation to fulfill the terms). Those important life decisions might become the worst things that ever happened to them if a buyer decides to walk out on a $300,000 contract. You can imagine why a seller might be downright irate if the Escape Clause slaps them in the face.

 

Pay Attention to the Wording

So as a potential buyer, what can you do to alleviate this? First, see what language your lender uses in the Escape Clause. The wording on a lender’s version of the Escape Clause might be subtly (but importantly) different from the official VA Escape Clause. A common adjustment is to change “exceeds the reasonable value of the property . . .” to “matches the reasonable value of the property . . .” This essentially gives the buyer the power to walk for any reason whatsoever as long as the sale value isn’t the exact same as the appraised value. If language like this is used, you can expect that a seller would rather de-list the home than selling it to a VA borrower. Knowing in advance what the lender’s Escape Clause states and making the seller aware as well can quite literally make the difference between getting your dream home and not.

 

Good Communication with the Lender and Seller

Remember that the seller is able to renegotiate the terms of the sale as long as no laws are violated. They can adjust the asking price or even de-list the property. In all home sales, it’s important to maintain good communication with both the lender and seller. This way, you will be able to cut down on any unwanted surprises at closing.

At Low VA Rates, we pride ourselves on being transparent and educating all our borrowers on their different options. To learn more about VA loans and the different loan options we offer, check out other pages on our site. To get started on your loan application now, call 866-569-8272.

Discovering Damage In a Home Purchased With a VA Loan

So you found an amazing home, applied for a VA loan, got approved, and bought the home of your dreams. A few months later, as you’re going about your business, you notice a defect or damage to the home that wasn’t caused by you or your family. Professional inspections should be quite thorough, and VA appraisals are as well, but it’s still possible that a serious construction defect or some damage to the home was missed in the inspections. In this sort of situation, what recourse does the buyer have? This actually depends upon whether the home is a “new construction” home or an “existing construction” home. A new construction home is one that was built by the buyer, while an existing construction home was built sometime in the past and the buyer simply bought it.

If it is a new construction home, then the borrower has up to a year to report the defect through the Department of Veterans Affairs. The complaint will then be addressed by the VA. Most newly-built homes have a one-year warranty or something similar in order to protect the buyer from those kinds of defects, and it is the warranty that the VA will work with in order to resolve the issue on behalf of the buyer. These warranties have typically expired in the case of existing construction homes, which makes them a little more difficult to work with in some cases. But even where the builder’s warranty has expired, the VA will still go to bat for you if you file a complaint.

Because existing construction homes have different purchasing terms which often absolve the sellers of any responsibility for damages to the home discovered after purchase, the VA sometimes does not have much recourse in the event of a complaint. However, filing a complaint is still a very smart decision because it could be a situation where the VA will end up covering the cost of fixing the defect for you. When the VA receives a complaint, it is evaluated whether the damage would have existed before or after the VA appraisal. It is also evaluated whether the damage should have been discovered in the official appraisal, based on the rules and guidelines the VA has for their appraisals.

The principal concern for the VA is whether the damage or defect being complained about is something that the appraiser should have caught but didn’t. In most scenarios, this is the only case where the VA can really do anything about it. For that reason, when you file a complaint with the VA there are two questions they try to answer: did the defect or damage occur before the VA appraisal, and should the appraiser have seen the defect or damage had the appraisal been done according to code? In reality, this system also protects the VA from fraudulent, frivolous, and recent damage to the home.

If the VA determines that the answer to both questions above are ‘yes’, there are two actions the VA must take, and one they might. They might take “administrative action” against the appraiser who missed the defect, but they must send a report to Loan Management and a response to the buyer with an update on the status of the complaint. In their report to Loan Management, they must include the loan file, copies of all the documentation related to the complaint and the results of their investigations into the appraiser who appraised the home in question, and a list of repairs necessary to get the house back up to VA minimum standards. The list of repairs is made up using all the information available at the time of sending the report, so is certainly not definitive, but is intended to give a ballpark estimate.

Once Loan Management receives the report, they will review it, and notify the veteran of the results of the review.

In cases where the damage is legitimate, but not related to something the VA would have picked up during the appraisal, there is less that they can do but there are still some actions they can take on the behalf of the borrower, so it is always a good idea to file a complaint with the VA if you notice damage in your home within a year after purchase.

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