VA Loan Articles
VA Loan Rules: The Mandatory Escape ClauseThere are many questions about VA home loans, but not all of them come from the buyer's perspective. Sellers are also curious about the ins and outs of VA home loans. One particular question is important for buyers AND sellers, pertaining to the VA loan escape clause that allows a buyer to back out of a VA home loan agreement if the appraised value is lower than the sales price.
A common version of this question goes like this:
"I am a seller. What are my rights if I am not comfortable signing the escape clause? On my sales document, it states that the buyers can walk for whatever reason if the VA does not value the home appraised at the full buying price.I don't want to sign this document, what are MY rights as the seller?"
The Department of Veterans Affairs requires this "escape clause" as a safety margin for the VA loan applicant. The escape clause protects the buyer from being obligated to a VA mortgage loan when the appraised value of the home does not match the sales price.
The escape clause is in essence, the following:
"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 is needed because VA will not guaranty loan amounts that exceed the appraised value of the home plus any allowable add-ons to the loan amount.
In cases where the appraisal value is lower than the asking price, the borrower would be required to pay the difference in cash if he or she wanted to proceed with the home loan anyway.
But there are those who can't or won't not pay that difference out of pocket. The escape clause is required to prevent the borrower from being forced into a loan they can't afford or don't want.
Buyers and sellers alike should know that the VA loan escape clause is non-negotiable--in fact, the VA requires any sales contract that does not contain the clause to be amended for its inclusion as a requirement of loan approval.
Sellers have the right to re-negotiate many terms of the sale, including seller concessions, asking price, etc. Sellers are free to de-list the property or refuse to sell based on price or other factors in the negotiation as long as Fair Housing laws or binding legal agreements
are not violated. But the VA loan escape clause is required by law and cannot be omitted or redefined.