Understanding the Mandatory Escape Clause on VA Loans

The VA protects its veterans in many ways. Not only do they have flexible underwriting requirements and low fees/rates, but they also have what they call a ‘mandatory escape clause.’ This clause, while not incredibly pleasing to sellers, protects veterans from being forced to buy a home that doesn’t have the value they thought it had.

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The Escape Clause Explained

The basic premise of the Mandatory Escape Clause is that the buyer has the right to back out of the purchase if the home doesn’t appraise for the agreed-upon sales price.

Let’s say for example that you agree to buy a home for $150,000. That was the full asking price and you really want the home. You go through the financing process just fine, but when it comes to the appraisal, the appraiser states that the home is only worth $135,000. This means the VA will only finance $135,000. That leaves you $15,000 short for the purchase. The Mandatory Escape Clause lets you out of the contract if this is the case.

In addition, you won’t lose your earnest money or have to pay any penalty for backing out of the contract, for value reasons only.

Can you Buy the Home Still?

The Mandatory Escape Clause doesn’t prohibit you from buying the home, though. If you decide that you still want it, you may move forward with the sale.

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Here’s how it will differ, though. Typically, you don’t need a down payment on a VA loan. You can secure 100% financing (according to the home’s value). Since in this case, the home appraised for $135,000, the VA lender can only provide you with $135,000. You must put down $15,000 plus the closing costs. You will need to verify your assets to prove to the lender that you have the money to do this transaction. This means that you’ll need to provide your last two months of bank statements showing that you do, in fact, have the money for the extra down payment.

What do Sellers Say?

Some sellers aren’t thrilled with the Mandatory Escape Clause. It pretty much just protects buyers, but if sellers want the largest audience possible, they will be willing to accept VA financing. The escape clause is similar to an appraisal contingency that any buyer, even non-VA buyers, can add to their contract. It just makes sense to do so. Why would you want to buy a home that is worth less than you are going to pay for it?

Of course, in some cases, VA buyers just want to waive the clause because the difference is minimal. It’s up to you how much you are willing to put towards the home, knowing that the value is lower. Talk with your financial advisor before making such a decision so that you know the best decision to make in a situation like this.

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