The Federal Housing Administration (FHA) insures mortgages with certain lenders to help borrowers qualify for a mortgage loan.
Specifically, those who have lower credit scores and less down payment savings will find it easier to get an FHA loan than a conventional mortgage. “Generally speaking, an FHA mortgage is the best choice for borrowers who have limited down payment and a credit score below 680,” says Jeff McGrath, branch manager at Crown Mortgage Company.
That said, there are things to consider before getting an FHA loan. One of those is the FHA amendatory clause, which provides extra protection for the buyer and the FHA.
What is the FHA amendatory clause requirement?
With an FHA loan, the mortgage lender is required to inform you of the home’s appraised value before you sign the sales contract. If not, an FHA amendatory clause is required.
The FHA amendatory clause essentially ensures that the home is worth enough to secure the loan. “The home appraisal value needs to be no less than the contract sales price,” says McGrath.
“The maximum allowable FHA loan amount is calculated off the lower of the contract price and the appraisal.” This protects the FHA from potentially losing money if the house goes into foreclosure.
FHA Amendatory Clause: What’s in it for buyers
The FHA amendatory clause specifically states that the buyer is not legally required to go through with a home sale if the appraised value comes back lower than the price listed on the sales contract.
What’s more, if this happens, the buyer gets back his or her earnest money and doesn’t have to pay any kind of penalty, even if one was spelled out in the initial contract.
Who signs the FHA amendatory clause?
The buyer, co-buyer (if applicable), seller, buyer’s agent, and seller’s agent are all required to sign the FHA amendatory clause before the lender performs the necessary appraisal on the home. And yes, it’s required that each party involved sign the clause for the deal to go through.
An FHA amendatory clause may or may not kill a sale
If the appraisal value of the home comes back less than the sales price, the buyer can get out of the sale without losing any money. But if the buyer is still sold on the home, they can still go through with the sale if they want to.
That said, it’s important to remember that the FHA likely won’t allow the lender to offer you a mortgage loan higher than the appraisal value. So, if the sales price is higher — say, by $3,000 — the buyer would need to make up that difference on their own.
When an FHA amendatory clause isn’t required
According to the U.S. Department of Housing and Urban Development (HUD), there are some instances where an FHA amendatory clause isn’t required to close on a home.
Those instances include:
- Real estate owned by HUD
- Sales by Fannie Mae, Freddie Mac, the Department of Veterans Affairs (VA), Rural Housing Services, or other federal, state, and local government agencies
- Foreclosure sales
- Sales where the borrower will not be the owner-occupant
Other FHA loan requirements to know
The FHA amendatory clause is far from being the only requirement the FHA has for lenders and borrowers. Here are just a couple other requirements that can help you make sure that an FHA loan is right for you:
Credit score requirements
You can get an FHA-insured loan with a credit score as low as 500. But to qualify for the agency’s low 3.5% down payment, your credit score must be at least 580. If it’s lower than that, you have to put down at least 10% of the loan.
Since the FHA is insuring the loan for you, it’s the FHA and not the lender that loses if you end up foreclosing. Mortgage insurance is designed to protect the agency against that risk.
There are two types of mortgage insurance that you have to pay when you get an FHA loan: an upfront mortgage insurance premium (UFMIP) and an ongoing mortgage insurance premium (MIP).
The UFMIP is a flat 1.75% of the loan amount. So, if your loan is for $200,000, you’d pay $3,500 at closing. On an ongoing basis, you’ll pay MIP annually between 0.45% and 1.05% of the base loan amount, depending on the term of your mortgage and how big your initial down payment is. You can learn more about your annual MIP figure here.
Shop around for the best FHA loans
If you’re planning to get an FHA loan, don’t expect the agency to score you the lowest rate. It’s simply insuring the loan so that banks will be more likely to lend to you.
As such, it’s critical that you check out several mortgage lenders to make sure you get the best interest rate available to you.
Get rates from three to five lenders, at a minimum. Carefully compare those rates and other loan features to make sure you get the right one for your needs.