Welcome to our comprehensive guide on the VA loan escape clause. We’ll take you through everything you need to know about this clause, how it works, and your options. If you’re in the process of getting a VA loan, or you’re a homeowner using a VA loan and want to know your options, you’re in the right place. Read on for our in-depth analysis on this crucial aspect of VA loans.
What is the VA Loan Escape Clause?
The VA loan escape clause is a provision in VA loans that allows borrowers to get out of their mortgage commitment if certain conditions are met. Specifically, the clause allows for a borrower to back out of the purchase agreement if an independent appraiser determines that the property is worth less than the purchase price. With this clause, the borrower is not held responsible for any fees or penalties related to the loan.
The VA loan escape clause provides significant protection for veterans and service members. It ensures that they are not held accountable for a bad investment, particularly when the value of a property drops due to external factors. Let’s explore this clause in more detail.
How Does the VA Loan Escape Clause Work?
When a borrower signs a purchase agreement to buy a property with a VA loan, the agreement includes a contingency clause that allows them to cancel the contract if certain conditions are not met. One of these conditions is the appraisal contingency, which specifies that the property must appraise for at least the purchase price. If the appraisal falls short, the borrower may have the option to exercise the VA loan escape clause and cancel the contract.
Here’s how the VA loan escape clause works in practice:
Step |
Description |
|---|---|
1 |
Appraisal |
2 |
Value is less than purchase price |
3 |
Option to exercise escape clause |
4 |
Cancel the contract |
The VA loan escape clause can help protect borrowers from situations where they are paying more for a property than it is worth. In such cases, exercising the clause may be the best option.
When Can You Exercise the VA Loan Escape Clause?
The VA loan escape clause can only be exercised if the appraisal of the property comes in lower than the purchase price. Additionally, the clause is only valid during a specific timeframe specified in the purchase agreement. If the appraisal comes back lower than the purchase price after the specified timeframe, the buyer will not be able to use the escape clause to get out of the purchase agreement.
It’s important to note that the VA loan escape clause does not provide a guarantee that a borrower can walk away from a purchase agreement without any consequences. When a buyer exercises the clause, they must be prepared to lose their deposit and any other fees associated with the purchase agreement. This includes fees for inspections, appraisals, and title searches. The VA loan escape clause is not a way to get out of a contract without any financial repercussions.
What Are Your Options When You Exercise the VA Loan Escape Clause?
If you decide to exercise the VA loan escape clause, you have a few options:
- Cancel the contract and walk away
- Negotiate with the seller to lower the purchase price to the appraised value
- Pay the difference between the appraised value and the purchase price out of pocket
Each of these options has its pros and cons, and you should carefully consider which one is best for you before making a decision.
Why is the VA Loan Escape Clause Important?
The VA loan escape clause is important because it protects borrowers from making a bad investment. Real estate prices can be unpredictable, and sometimes a property’s value drops unexpectedly. If a borrower has to pay more for a property than it is worth, they may end up in a difficult financial situation. The VA loan escape clause ensures that borrowers have an option to walk away from a purchase agreement if the property is worth less than the purchase price.
FAQs
What is a VA loan?
A VA loan is a mortgage loan program offered by the US Department of Veterans Affairs. It is specifically designed for veterans, active-duty service members, and eligible surviving spouses.
What is an appraisal?
An appraisal is an independent evaluation of the value of a property. It is typically conducted by a licensed appraiser.
What is a purchase agreement?
A purchase agreement is a contract between a buyer and seller that outlines the terms of the sale of a property.
What is a contingency clause?
A contingency clause is a provision in a contract that outlines conditions that must be met for the contract to be valid.
What is an appraisal contingency?
An appraisal contingency is a provision in a purchase agreement that allows the buyer to cancel the contract if the property does not appraise for the purchase price.
What is an escape clause?
An escape clause is a provision in a contract that allows one party to back out of the contract under certain conditions.
What fees am I responsible for if I exercise the VA loan escape clause?
If you exercise the VA loan escape clause, you may be responsible for fees associated with the purchase agreement, such as inspection fees, appraisal fees, and title search fees. You may also lose your deposit.
Is the VA loan escape clause the same as a home inspection contingency?
No, the VA loan escape clause is not the same as a home inspection contingency. A home inspection contingency allows the buyer to cancel the contract if the property has significant defects or issues that were not disclosed in the seller’s disclosure form. The VA loan escape clause, on the other hand, allows the buyer to cancel the contract if the property does not appraise for the purchase price.
Can I still use the VA loan escape clause if I’ve already closed on the property?
No, the VA loan escape clause is only valid during the purchase agreement process. Once the property has closed, the buyer cannot use the escape clause to cancel the loan.
Can I use the VA loan escape clause if I have a cash-out refinance?
No, the VA loan escape clause only applies to purchase loans. If you have a cash-out refinance, you cannot use the escape clause to back out of the loan.
What happens if the appraisal comes back higher than the purchase price?
If the appraisal comes back higher than the purchase price, the VA loan escape clause does not apply. The buyer is still obligated to fulfill the terms of the purchase agreement.
What happens if the property is worth less than the purchase price, but the buyer still wants to buy it?
If the property is worth less than the purchase price, but the buyer still wants to buy it, they have the option to negotiate with the seller to lower the purchase price to the appraised value. The seller may or may not agree to this, depending on the circumstances.
What happens if the seller refuses to lower the purchase price?
If the seller refuses to lower the purchase price to the appraised value, the buyer has the option to pay the difference out of pocket or walk away from the purchase agreement.
What is the VA loan funding fee?
The VA loan funding fee is a one-time fee charged by the VA to help offset the cost of the loan program. The fee varies depending on the type of loan and the borrower’s military service status.
Conclusion
The VA loan escape clause is a crucial aspect of VA loans that protects borrowers from making a bad investment. If you’re in the process of getting a VA loan, it’s important to understand how the escape clause works and your options if you need to exercise it. Remember, the VA loan escape clause is not a way to get out of a contract without any financial consequences. Make sure you weigh your options carefully before making a decision.
If you have any questions or concerns about the VA loan escape clause, consult with a qualified VA loan expert to get the guidance you need.
Closing
Thank you for reading our guide on the VA loan escape clause. We hope you found the information helpful and informative. Remember, the VA loan escape clause is a powerful tool that can protect you from making a bad investment. If you’re considering a VA loan, make sure you understand how the escape clause works and your options if you need to exercise it.
Disclaimer: The information contained in this article is for informational purposes only and does not constitute legal or financial advice. Consult with a qualified professional before making any decisions related to a VA loan.