VA Loan Escape Clause - Explained

When navigating the VA loan homebuying process, it's essential for both Veterans and lenders to be familiar with the VA Mandatory Escape Clause. This clause keeps the seller in check and protects the buyer from overpaying if the VA appraisal determines the value of the home is lower than the asking price.

In this article, we will explore the clause’s implications for Veterans and sellers in home loan transactions.

What is the VA Loan Escape Clause?

The VA Loan Escape Clause acts as a safety net for buyers using a VA loan. Essentially, it stipulates that if the contract purchase price or cost exceeds the reasonable value of the property established by the VA, the buyer is not obligated to go through with the purchase. They will also not be penalized for the forfeiture of any earnest money deposits, which will be returned to the buyer.

This clause presents several options to Veteran buyers if the appraisal comes in lower than the agreed purchase price. These include:

• Negotiating with the seller to lower the purchase price
• Making a down payment equivalent to the difference between the purchase price and contracted price
• Withdrawing from the transaction without forfeiting earnest money deposits

What is an Earnest Money Deposit?

An earnest money deposit, sometimes referred to as a good faith deposit, is an amount that a buyer pays in advance when making an offer on a home to demonstrate their sincere intention to purchase the property. This deposit typically ranges from 1-3% of the property's purchase price.

This deposit is a security measure for the seller, protecting them if the buyer decides to back out of the deal. Essentially, it ensures that the buyer is as committed to the transaction as the seller is.

VA Escape Clause Requirements

For the VA Escape Clause to be valid, it must be signed by both the Veteran buyer and the seller in all VA-guaranteed purchase transactions. This requirement applies if the Veteran signed the sales contract before receiving the Notice of Value (NOV), which provides the property's appraised value.

It's worth noting that it's the lender's responsibility to ensure that the VA Escape Clause is included in the sales contract. This crucial step secures the rights of the Veteran buyer and supports the successful execution of the home purchase transaction.

Limitations of the VA Escape Clause

While the VA Escape Clause offers a substantial level of protection, it does have its limitations. For instance, it only allows the termination of a contract if the appraised value of a property is lower than the contract price. It doesn't offer protection for any other potential issues or disagreements that might arise during the buying process.

Furthermore, it's important to note that deposits made for upgrades in a new construction contract are not treated as earnest money. If a buyer chooses to exit the transaction due to a lower appraisal value, the builder is not obligated to refund these deposits under the VA Escape Clause. This is something many buyers overlook and should be aware of when entering into such contracts.

Can the VA Help Veterans Get Their Earnest Money Deposit Back?

While the VA plays an important role in facilitating and regulating VA-guaranteed home loans, its involvement in the specifics of individual transactions, including earnest money deposits, is limited. The VA can provide guidance on the Escape Clause and explain how it relates to the potential refundability of earnest money, but it doesn't directly handle these funds.

Earnest money is typically held in escrow by a title company, which is responsible for distributing funds based on the agreed contract terms. If a Veteran uses the Escape Clause and terminates the contract due to a lower-than-expected appraisal, the title company is obliged to return the earnest money deposit to the Veteran.

However, it's important to note that the VA does not have jurisdiction over civil disputes, including any that might arise over the return of earnest money. Veterans are advised to seek their own legal counsel in such cases. The VA's role is primarily to provide guidance and ensure proper administration of the VA loan program.