VA Escape Clause

Do you know about a standard part of every VA loan contract called the VA escape clause? This important protection for VA borrowers is a mandatory inclusion in all VA loan sales contracts. What is it?
 
The VA escape clause provides a legal means of cancelling the purchase of the home when the appraised value—something which can only be established by the appraisal carried out by a VA fee appraiser—ends up being lower than the sale price of that property. 

The sale price and the appraised value can differ, but the borrower cannot be legally forced to purchase a home that would require him or her to make a payment above and beyond the appraised value.
 
The authority for this is found in Chapter Nine of the VA Lender’s Handbook; “If the sales contract was signed by the veteran prior to receipt of the NOV (Notice Of Value), the contract must include, or be amended to include, the clause below.”
 
Here is a sample of that clause, which is considered “amendatory” and a part of any sales contract for VA loans regardless of whether it was actually included or not:
 
“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))”
 
What does this clause do for the borrower? At the most basic level, the borrower has the right to cancel the sale when the sale price is higher than the appraised value. The borrower must not be required to forfeit earnest money in such cases. You cannot be financially penalized for walking away from the sale in terms of fines, forfeiting earnest money, etc. 

You won’t get a refund for the appraisal fee or other “services rendered” fee, but you won’t give up your earnest money.
 
Second, the escape clause is valid and enforceable regardless of whether it was included in the original agreement signed by the buyer and seller. Note the language of the clause where it states, “If the sales contract was signed by the veteran prior to receipt of the NOV (Notice Of Value), the contract must include, or be amended to include, the clause below...” That is important to remember when considering your options.

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