VA Escape Clause
Once a property has been selected by a homebuyer, a purchase contract is drawn up that outlines the details of the home sale transaction.
One element of the contract is the VA Escape Clause. The VA Escape Clause must always be included in a VA home loan purchase contract. Tt safeguards buyers using a VA home loan by giving them an option to negotiate, proceed as is, or exit from a signed purchase agreement, “if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs.”
If the loan papers are signed before the Notice of Value is received, the VA Escape Clause allows the buyer to back out of the purchase without penalty if the property's negotiated price is higher than the "reasonable value" determined by VA. This means that the buyer will not lose their earnest money deposit. The buyer also has the option to proceed with the purchase, but the loan amount would be capped at the lesser of the agreed-upon purchase price or the reasonable value (whichever is lower).
The Code of Federal Regulations outlines the requirements for the VA Escape Clause in 38 CFR § 36.4303(k)(4), stating:
"It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs.”
Frequently Asked Questions
What loan types require the VA Escape Clause?
The VA Escape Clause must be signed by the buyer and seller on all VA home purchase loans, if the sales contract is signed before the Veteran receives the Notice of Value. This includes contracts for new construction. If the VA Escape Clause is missing from the purchase contract, the contract must be amended to include the clause before the loan closing.
Who is responsible for including the VA Escape Clause in the contract?
It is the lender’s responsibility to ensure that the VA Escape Clause is included in the sales contract before closing. In the event the clause is not in the sales contract, VA will not guarantee the loan.
What protections does the VA Escape Clause offer to Veterans?
If the reasonable value established by VA is lower than the contracted purchase price, the VA Escape Clause allows the Veteran to:
- Negotiate with the seller to lower the purchase price
- Proceed with the transaction by covering the price difference by making a down payment with the Veteran's funds
- Exit the transaction without forfeiting any earnest money deposit
What if the buyer disagrees with the reasonable value established by the VA?
The home buyer can request a reconsideration of value.
What protections does the VA Escape Clause NOT provide?
The VA Escape Clause may not be used to cancel a loan purchase contract for any reason other than in response to the reasonable value established by VA being lower than the contract price.
Are deposits for upgrades in new construction covered by the VA Escape Clause?
No, deposits to the builder for upgrades for new construction are not considered earnest money and are not covered by the VA Escape Clause. The builder is not required to refund them.
If the Veteran chooses to cancel the transaction, can VA help recover their earnest money deposit?
VA supports Veterans by providing guidance to title companies, real estate professionals, and other stakeholders about the VA Escape Clause and the rules around refunding earnest money. If a contract is terminated because the reasonable value established by VA is lower than the contract price and the buyer invokes the VA Escape Clause, the title company or other entities holding the escrow funds must follow the contract terms and return the deposit, if applicable. However, VA cannot intervene in civil disputes or provide legal advice.
