There are all sorts of escape clauses that you can have added to any loan contract, but the VA escape clause refers specifically to a clause intended to protect VA loan buyers in the event that a home is appraised at considerably less than the contracted sale price.
If you and the seller make a verbal agreement to make the transaction before the home has been appraised by a VA-approved professional, suppose the seller prices the home at $120,000, but the home is then appraised at $90,000 and the VA decides not to cover the remainder, you now have the option of covering the remaining thirty grand with some other means of income, attempting to renegotiate with the lender, or simply backing out of the deal entirely without worry.
How Do You Include A VA Escape Clause In The Loan Contract?
If you’re taking out a VA loan, the escape clause will be part of the contract by default. This is a requirement of the VA loan program. Most VA lenders already know all there is to know about the process, so you shouldn’t get any blowback there, although some home sellers may be taken aback by this ruling. It’s best if they know up front what a VA loan entails so that you can avoid any hangups later on into the process. When you first start discussing the purchase with them, let them know that the VA loan process will come with its own appraiser and an escape clause.
No Penalties At All?
The wording of the VA escape clause states that the buyer will not incur any penalty by forfeiture of earnest money. The clause also states that the buyer will not be required to complete the deal if the contract price exceeds what the VA considers reasonable based on their appraisal. No further action will be required on your part if you decide to back out.
No Further Action? Are You Sure?
If you want to get everything squared away, you can talk to your attorney. If you want to be polite, you can let the seller know that you’re no longer interested. But you could also just stay at home and not answer the phone for awhile, and you’ll be legally within your rights. It’s a clean break. You don’t have to pay a dime to break the contract at this point.
How Does The VA Determine A “Reasonable Value?”
The VA appraiser is going to be looking at a wide range of factors in determining the value of the property. Although two different appraisers might come away with two different values, it’s not exactly “subjective.” Anyone can eyeball a house and say “I’d put that at about a quarter million.” An appraiser is trained to evaluate a home properly, and will have access to all the necessary data to add up the relevant costs and do the math and come away with a price that is fair to both the buyer and the seller.
Factors weighing into an appraiser’s quote can include the following:
- Neighborhood characteristics. This means things like recent sale prices as well as concerns like crime rates, the risk of fire, flooding, and other damages, whether it’s right by a noisy airport and so on.
- Utility details. If the home is a bit of a power-sucker, that will weigh into the price. If it does not use low-flow toilets, if the bathtub requires a few extra gallons to fill, if it’s spacious and requires a little more power to heat in the Winter, this all comes into play. The more it costs to keep the lights on, the lower the appraiser is going to set the price.
- Days on the market. Sometimes the appraiser’s job isn’t just to get you a fair price, it’s to give the seller a wake-up call. If a home has been on the market for six months at $200,000, it’s not worth $200,000.
- Repairs needed. A home seller that really knows what they’re doing and wants to make the maximum amount on their sale is going to make sure that the new owner doesn’t have a whole lot of pricey repairs to worry about. A fixer-upper home commands a fixer-upper price. If you’re handy with a power drill, this might even be what you’re looking for. But you don’t pay like-new prices for a home that needs work.
- The contract price. The contract price does, in fact, weigh into the decision. Ultimately the appraisal process is a bit like a negotiation between the appraiser and the seller. Of course, the less reasonable the seller’s contract price, the less likely the appraiser is to take it fully into account. Asking $120,000 for a $110,00 home, you might meet in the middle at $115,000. Asking for $220,000 for the same property means the seller’s probably going to have to settle for $110,000 if they want to make the sale at all.
A number of other factors may weigh in on a case by case basis. If a home is fitted with solar panels, for instance, then the price may be a little higher. The appraiser is expected to look at the home from every possible angle and set the fairest price possible.
Why Do Appraisers Sometimes Disagree?
One of the reasons that appraisals will sometimes differ is that many of the factors involved in the appraisal process are subject to marginal differences in value. An appraiser might get a repair quote from one plumber that’s only fifty dollars different from the next, but add that to a hundred dollar difference in the price of a new A/C unit, twenty dollars difference in utility estimation, it all adds up pretty quickly to a few thousand dollars, or more, from one appraiser’s estimation to the next.
The Appraiser Valued The Home Below The Contract Price, Now What?
Unfortunately, there’s no wiggle room on the appraisal. If a home is valued at a penny less than the contract asks, then the VA loan program will not back the full value of the loan. So what are your options when the appraiser and the seller have a disagreement?
- Renegotiate. Most sellers should be more than willing to negotiate if the disparity between the contract price and the appraisers isn’t too great. It’s a truly rare, and truly foolish seller who won’t budge on a 1% difference in appraisal and asking price. If the disparity is greater than that, renegotiation might be a tougher sell. The seller may honestly believe they can get a better price, and who knows? They could be right. If the seller just won’t accept the appraisal price, that doesn’t mean that renegotiation is impossible if you are willing to…
- Make up the difference yourself. Even if your seller won’t come all the way down to the appraiser’s quote, you can use the appraisal as a bargaining chip in negotiations. Maybe you can’t make up a difference of fifteen thousand dollars between the contract price and the appraisal, but having the appraiser’s quote on the table means that the seller is lucky that you’re willing to go over that price in the first place, and they might be more than happy to bring the price down a bit. On the other hand, some sellers just won’t budge. If that’s the case, you might be able to make up the difference with a cash loan or the money you make selling your former home, but it’s worth considering whether it’s worth the hassle to make a transaction with such an inflexible seller. More often than not, someone who squeezes every single piece of leverage they have in a deal is less interested in making money than they are in having a situation they can control. We’ll leave the in-depth psychoanalysis for another day, but in all business dealings, you should be careful not to get entangled with people who simply won’t be reasonable.
- Walk away. No matter how much you may like this home, it’s not the only decent property out there. You’ll certainly want to walk away if the repairs will cost more than you’d like to spend or if the seller is being unreasonable about the price. The appraisal isn’t just a formality, it’s there to make sure that you’re getting a good deal, and the process may turn up some major concerns. Some sellers are willing to make adjustments and get the home reappraised, but this isn’t always the case. Our advice: Always be prepared to walk away. No matter how much you love this house, you need to make sure that you keep other options on the table so that the seller doesn’t have too much leverage over you in negotiations. The best deals are those where the seller and the buyer are both happy with the transaction. If it doesn’t look like that’s going to happen, it’s best to just walk away.
- Take a loan outside the VA program. As a very last resort, if you really just can’t let this house go, there’s no law saying that you have to use your VA loan just because it’s available to you. You may have greater difficulty and pay back a higher interest rate on a non-VA-secured loan, but the option is there.
I Walked Away, Now What?
Now all you need to do is look for a different home to put your VA loan towards. Most likely you’ve already got a few properties on the “maybe” list. So this would be the time to start moving those homes onto the “probably” list and checking them out. It shouldn’t be hard to find a seller who will be happy to work within the confines set out by the VA loan program. Most sellers do tend to be fairly reasonable, and they’re happy to make a sale, even if it is for a little less than they initially thought the home was worth.
They Lowered The Price, Now What?
If they lowered the price, you can still walk away if you choose, even if they lowered it to the appraisal amount. The clause is for the existing contract, not for any following contracts.
If you’d rather sign a new contract and buy the home at the adjusted price, then it’s time to sign the paperwork for your VA loan. If they have lowered the cost down to the appraisal value, then that’s all you need to do. If you still have some extra cash to make the sale price, there are a number of options available to you. You may be able to talk with a private lender, sell your old home, or take out a cash loan. You will want to proceed with caution when taking out a loan outside of the VA program, but there are a lot of options available to you.