Players embarking on an escape room adventure must use clues, hints, and problem-solving strategies to unravel a mystery in order to win their freedom before the timer runs out. While it does require some serious effort and mental energy to successfully break free, there’s no real risk involved. It’s a fun game, so it doesn’t matter if you win or lose. In the real world, escaping a contract generally comes with consequences. For example, walking away from a real estate purchase agreement often means the prospective homebuyers must forfeit any earnest money that they’ve paid out. However, thanks to the VA loan escape clause, buyers using a VA loan may be able to walk away from a contract without penalty. How does this work?
The VA Loan Escape Clause
VA loans are often praised for providing favorable terms, but did you know they also include elements designed to protect their users? The VA’s Minimum Property Requirements ensure that the properties that are purchased with these funds are safe, sound, and habitable. On a similar note, the VA’s appraisal verifies that the property is worth the price being paid for it, and the VA loan escape clause protects the interests of would-be buyers if the appraisal comes in too low.
What Does the Escape Clause Say?
Sometimes called the VA option clause, the escape clause can seem intimidating at first glance, but anyone planning to use a VA loan to purchase a home should check that it’s included in any sales contract that they sign.
To make it easier for buyers utilizing a VA home loan to include the escape clause in their sales contract, the VA provides the following language: “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.”
What Does It Mean?
As RealEstate.com explains, the escape clause basically allows a buyer to walk away without forfeiting their earnest money deposit in a specific set of circumstances. The clause only comes into play if the VA’s appraiser submits a Notice of Value that puts the home’s appraised value below the purchase price that has been agreed to. If the appraisal is for an amount equal to or greater than the sales price, the clause is not triggered.
Why is this so important? The VA won’t approve a purchase loan for more than the property’s appraised value. The VA escape clause helps to ensure that would-be borrowers aren’t penalized because of a mismatch between the property’s price tag and its appraised value.
Is It Mandatory?
What happens if a buyer signs a sales contract that doesn’t include the escape clause? The VA makes it clear that the loan process cannot move forward until the issue is addressed. According to VA Pamphlet 26-7, lenders are directed to ensure that a sales contract signed by someone using a VA loan before a Notice of Value is available includes the escape clause. If it doesn’t, it must be amended to include this safeguard.
What If Escape Isn’t the Goal?
Although the VA’s escape clause allows buyers to walk away from a property when the appraisal doesn’t match the sales price, buyers don’t have to invoke it if they don’t want to. As Military.com explains, buyers who want to continue with the sale despite a low appraisal have three options:
- Appeal the appraisal. Buyers or sellers can request a Reconsideration of Value and provide data to support the argument that the initial appraisal was too low. If this appeal doesn’t work, buyers will have to walk away or choose one of the remaining options.
- Negotiate a lower sales price. If the difference isn’t great, sellers may be willing to lower their price to avoid losing the sale.
- Pay the difference. If they have the resources, buyers can opt to pay the difference between the loan amount and the sales price at closing.
Do you have questions about VA loans or the VA loan escape clause? Turn to PrimeLending of Manhattan, Kansas. With our fast, friendly service, we can provide the answers that you need and the expert insight that will help you to get the most out of your VA benefits. To learn more about the VA home loan program, check your eligibility, or get a rate quote, contact us today.