The Federal Housing Administration was formed in the 1930’s during the Great Depression. The idea behind this administration was to make it possible for people to get into a home even though they may be dealing with troubled finances. At the time, less than 50% of all Americans were homeowners and with the Great Depression, the real estate market was barely functioning. The government wanted to breathe life back into it, hoping that the rest of the economy would follow. In order for the concept to work, the homes purchased through this program have to meet certain eligibility requirements that make it possible for them to be resold in the event of a foreclosure – that way no money is lost when a home goes into default. This is where the amendatory clause comes in. It is the knot that will keep the entire deal together, or ultimately cause it to fall apart.
Start with the Appraisal
Before you can close on the loan with your federally approved lender, the home you are looking to buy has to go through an appraisal process. This is required for both federally approved loans and conventional loans. The purpose of this is to determine the value of the home, the safety of the home, and any repairs that may be necessary for occupation. They also look for future repairs that may not affect the home’s value now, but could in the future. Most appraisers are looking for structural issues, roof and flooring, amenities that have been added to the home, and so on. Federal ones look for everything you’ll get through the conventional method, plus a little bit more. These focus extra attention on the safety of the inhabitants, so they look for things like hand rails, disability access, pests, windows that are in disrepair, and even the paint used in the home. All of these can and do affect the value of the home and the safety of the inhabitants, so the lending institutions require one of their trusted people to go through the home before they will give the ‘okay’ for a loan.
FHA Amendatory Clause and Your Contract
When purchasing a home you don’t pick a home and slap down the cash hoping to become the proud owner of one of thousands of mortgages. Instead, the house is put under contract to offer a period of time for all the paperwork and requirements necessary can be filled out and met. Once a house is under contract you are legally bound to purchase that home unless something occurs that negates the contract; this can be either a clause in the contract that isn’t met, or the contract expires before all of the paperwork is completed, at which point you have to start over.
An FHA amendatory clause is included in the contract of every home that is purchased through the federal housing program. It is in place to protect the interest of all parties involved, including the banks, the government, and the homeowner. The amendatory clause states that if an appraiser goes through the home and determines the value of the home to be lower than the amount the seller is asking, the buyer does not legally have to honor the contract and buy the home. So basically if you want a two hundred thousand dollar loan on a home but the value comes out at one hundred and ninety thousand, the FHA amendatory clause says you can get out of the contract without any problems, leaving you free to purchase elsewhere.
If this clause was not in place, you could be put under contract with a home only to learn that it appraises for less than the original value stated, yet you would still have to buy it. You would be instantly upside down on your mortgage and an instant liability. With the FHA amendatory clause, you can rest easy knowing that the home you are buying is equal or more than the value of the loan you are acquiring to make the purchase.
The important thing to remember when making a home purchase is that your real estate agent and your loan officer are going to be your best assets. They can explain all of the ins and outs of the buying process to you. In addition, they can and should take the time to make sure any concerns you have regarding the purchase are discussed and worked out prior to your signature going down on that dotted line.