What is FHA Amendatory Clause?

A Federal Housing Administration (FHA) loan is a mortgage that is backed by the government and requires a lower down payment and lower credit scores. This type of loan attracts low to moderate income borrowers and makes homeownership possible for many buyers.

The FHA Amendatory Clause?

If you choose to go down that FHA loan route there's a document for both buyers and sellers to look out for and it's the FHA amendatory clause. This allows the buyer to back out of a sale with refund of earnest deposit if the price listed on the contract is higher than the appraisal which determines how much the property is worth. So if Wade wants to sell his home for $300,000 but the appraisal amount is $255,000 then you can back out of the deal with no financial penalty.

Why is this Important?

Hold on, I'm getting there. This only matters if the buyer wants to purchase a home with a FHA loan. The buyer puts down an earnest deposit to show the seller he or she is serious about purchasing the home. The Earnest Deposit can be from $1,000 to $10,000. This protects buyers and prevents sellers from maximizing profits. Sellers prefer the loan to be anything but an FHA or VA loan. Think like a seller, why should I reduce the price for a buyer? Sellers want to make profits but buyers want a great deal. As a buyer, remember in a competitive market FHA loans are not attractive and sellers prefer to deal with conventional loans to avoid the FHA Amendatory Clause.