A reader asks, “I am a seller. What are my rights if I am NOT comfortable signing the escape clause? On my particular document, it states that the buyers can walk for whatever reason if the VA does not give them the document stating that the home appraised at the full buying price…I DO NOT want to sign this document, what are MY rights as the seller?”
The VA loan “escape clause” is basically a safety net for the buyer, which prevents a VA loan applicant from being held to a VA mortgage loan when the appraised value of the home does not match the sales price. Specifically, according to VA.gov, the language of the escape clause may include the following:
“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 reason for this clause? The VA will not approve loan amounts that exceed the appraised value of the home plus any allowable add-ons to the loan amount. Borrowers must pay the difference in cash when the appraised value is lower than the sales price of the home. Many borrowers cannot or will not pay the difference out of pocket, so the Department of Veterans Affairs requires the escape clause to prevent a buyer from being held hostage to a commitment to purchase in cases where the sales price and the appraised value do not match.
The VA loan escape clause is non-negotiable. According to VA.gov, “If the sales contract was signed by the veteran prior to receipt of the NOV, the contract must include, or be amended to include” the escape clause. (The NOV mentioned in the quote is the document stating the VA appraised value of the home.)
Sellers should know that any contract involving a VA loan applicant must a VA loan escape clause as a condition of VA loan approval. Sellers have the right to re-negotiate many terms of the sale, including seller concession, asking price, etc. Sellers are free to de-list the property or refuse to sell based on price or other factors in the negotiation(provided Fair Housing Act laws are not violated due to a refusal to sell in a given situation). But the VA loan escape clause is required by law.
Do you have questions about VA home loans? Feel free to ask us in the comments section.
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