The amendatory clause is a paragraph that must be part of an FHA purchase contract signed before the appraisal is done, which describes nearly every FHA purchase. It says the buyer doesn't have to complete the purchase, and can't lose the earnest money deposit, unless the appraised value is at least the price in the contract. It also says the buyer may choose to go ahead anyway. The rule traces back to section 226 of the National Housing Act (12 U.S.C. 1715q), which requires that an FHA buyer learn the appraised value before being bound to the sale.
What the clause says
HUD's model wording covers four points:
- The buyer isn't obligated to buy, and owes no penalty or forfeited deposit, unless the buyer receives a written statement of an appraised value of not less than the contract price.
- The buyer has the option to proceed with the purchase regardless of the appraised value.
- The appraisal is used to set the most HUD will insure. HUD doesn't warrant the home's value or condition.
- The buyer should be satisfied that the price and condition are acceptable.
The dollar blank in the clause holds the contract price. Buyer and seller sign it, and in many sales the agents sign too. Florida Realtors/Florida Bar contracts usually carry it through the FHA/VA financing rider attached to the contract.
VA has a matching requirement, often called the VA escape clause, tied to the value on the VA's Notice of Value. Conventional and USDA loans have no federal clause of this kind, so the purchase contract's own financing and appraisal terms do that job.
A worked example
An FHA buyer with a 580 or higher score signs a contract at $340,000 and puts down a $5,000 deposit. The plan is 3.5% down, $11,900. The appraisal comes back at $332,000.
FHA lends up to 96.5% of the lower of the price or the value, so the most the base loan can be is 96.5% × $332,000 = $320,380.
| Choice | Price | Base loan | Down payment | Deposit |
|---|---|---|---|---|
| Original plan | $340,000 | $328,100 | $11,900 | Applied at closing |
| Proceed at full price | $340,000 | $320,380 | $19,620 | Applied at closing |
| Seller cuts to the value | $332,000 | $320,380 | $11,620 | Applied at closing |
| Cancel under the clause | none | none | none | $5,000 returned |
Proceeding at the full price takes $7,720 more cash ($19,620 − $11,900). If the seller drops to the appraised value, the buyer needs $280 less than planned. If neither choice works for the buyer, the clause returns the full $5,000.
How to use it well
The clause gives you bargaining power. A seller who knows the buyer can walk with the deposit has a strong reason to meet the appraised value, and the next FHA or VA buyer's appraiser will likely see the same comparable sales. Keep a copy of the signed clause with your contract, read the appraisal the day it arrives, and give your answer before the contract's deadlines run. If the home is worth the full price to you, a gift from family can cover the gap.
The FHA loan requirements guide covers the down payment and loan-to-value rules behind these numbers. If an appraisal just came in under your price, call AAA Capital Funding at 888-601-8344 and we'll lay out the cash each choice takes before you answer the seller.