There 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. Let’s dive into one aspect of the VA loan that sellers are particularly interested in: the Escape Clause.
The VA escape clause protects the buyer to back out of a VA home loan agreement if the home's appraised value does not match the sales price. This escape clause is a safety margin for the VA loan applicant.
The escape clause is needed because the VA will not guarantee loan amounts that exceed the appraised value of the home. This includes any allowable add-ons to the loan amount.
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 renegotiate many terms of the sale, including seller concessions and asking price. Sellers are free to delist 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.
If 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 some borrowers can't or won't 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.