How the FHA Amendatory Clause and Certification Form Work

If you plan to get a Federal Housing Authority (FHA) home loan, you’re going to have to read and sign an FHA amendatory clause and real estate certification form. The FHA amendatory clause is a disclosure that lets the buyer cancel the home purchase and receive a refund if the home is appraised for less than the agreed-upon value.

The FHA requires amendatory clauses and certification forms for most of its home loans and will not back mortgages without one. Each party engaged in the real estate transaction must sign the disclosure form. If you don’t sign the form, the FHA will not insure the loan, and the lender will likely deny it.

What is the FHA amendatory clause?

Before the sale of a home can be finalized, the FHA requires the buyer to sign an amendatory clause. The clause is a disclosure form stating that the buyer is not obligated to go through with the sale if the home’s appraised value is less than the agreed-upon sales price.

Amendatory clauses are sometimes called “escape” clauses because they let the buyer “escape” the sale without any penalty. In addition to leaving the sale, the amendatory clause lets the buyer recoup any earnest money they paid.

Here’s how it works: Say you want to finance a property with an asking price of $400,000 and pay a $4,000 earnest money deposit. However, the appraised value of the home comes back at $380,000. The amendatory clause would let you walk away from the sale and recoup your $4,000.

The amendatory clause is usually embedded directly in the real estate sales contract or added to the contract as an FHA addendum. All parties involved in the sale, including the buyer(s), seller(s), and their respective agents, must sign the amendatory clause disclosure form for it to be valid.

FHA amendatory clause example

Here is what an FHA amendatory clause might look like in a contract:

This excerpt is a bit of dense legalese, so here are the essential points to understand:

• You can back out of the sale if the appraised value is lower than the sales price.
• The seller must give you back any earnest money.
• You can still proceed with the sale if you choose.
• HUD does not guarantee house condition or value.

What’s the purpose of the FHA amendatory clause?

FHA’s amendatory clause requirements protect both home buyers and sellers, but buyers in particular benefit.

Most importantly, the FHA amendatory clause protects buyers from low appraisals. Buying a home for more than it’s worth is a risky gambit.

You’ll owe more on the loan than the home is worth, which could cause problems if you intend to sell later. Additionally, the lack of equity means refinancing options will be limited, if available at all.

From the seller’s perspective, the amendatory clause clarifies their obligations and also ensures loan stability. The appraisal denotes the maximum loan amount the FHA will insure, so lenders cannot artificially push up loan values.

Basing the price on an objective market appraisal is the best way to ensure both parties benefit from an efficient and fair sales transaction.

The amendatory clause states that the buyer can still go through with the sale if the appraised value is lower than the sales price. However, the FHA won’t insure any loan above the appraised value, so you would be responsible for covering the difference.

Another option in this instance would be to get a type of loan that would not require an amendatory clause (more on this below).

What is the real estate certification form?

Sales contracts have another disclosure form called the real estate certification form. A real estate certification is a separate but required form that is closely related to the amendatory clause.

The certification form states that the involved parties are all in agreement about the terms and conditions of the contract.

The signers of the real estate certification agree that all the terms and conditions in the sales contract are true and that there are no other sales conditions not explicitly mentioned in the contract.

The point of the certification form is to prevent hidden sales conditions and ensure everyone is on the same page.

Like the amendatory clause, the real estate certification form must be signed by the buyer, seller, and their respective sales agents. It is usually included just below the amendatory clause as part of an ordinary real estate sales contract.

And like the amendatory clause, the real estate certification form is mandatory to secure an FHA-backed loan.

Both the amendatory clause and real estate certification form are part of the FHA’s broader push to stabilize housing markets, reduce fraud, and lower the burden for first-time home buyers.

When the FHA amendatory clause is not required

The amendatory clause is generally required if you want to get an FHA-backed mortgage. 

However, there are a few exceptions where an amendatory clause is not mandatory:

• FHA 203(k) loans: FHA 203(k) loans are meant to finance and renovate properties, so they are exempt from typical appraisal requirements for FHA loans. FHA 203(k) loans factor in property repairs, so there is a different appraisal process.

• HUD REO sales: The amendatory clause is also not required on the sale of foreclosed properties owned by HUD. These homes are usually sold at a steep discount

• Other government agencies: FHA does not require the amendatory clause on transactions where the seller is Fannie Mae, Freddie Mac, USDA, or other federal/state government agencies.

• Foreclosure sales: Sales from sellers at foreclosure auctions can proceed without an amendatory clause disclosure.

• Non-owner-occupied transactions: Transactions where the buyer will not occupy the property (e.g., non-profit sales) are also exempt from amendatory clause requirements.

The bottom line

To summarize: The FHA amendatory clause and real estate certification protect buyers and sellers by preventing overinflated loans and ensuring all parties are on the same page with the transaction. When securing an FHA-backed loan to buy a home, you, the seller, and your respective agents must all sign both the amendatory clause and real estate certification form.

These two forms are mandatory for most kinds of FHA loans, so don’t forget them when signing the sales contract. If you neglect signing, there is a major risk your loan will be denied and the sale will fall through.

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