Can You Waive Appraisal Contingency on an FHA Loan?

Federal Housing Administration (FHA) loans offer a pathway to homeownership for many, often requiring a lower down payment compared to conventional mortgages. Lenders require a property appraisal to confirm the home’s market value aligns with the loan amount. An appraisal contingency protects buyers by allowing them to withdraw if the property appraises for less than the agreed-upon price. Understanding how FHA loans interact with these contingencies is important for buyers and sellers.

The FHA Appraisal Process

An FHA appraisal is required for any property purchased with an FHA-insured mortgage. This process evaluates whether the property meets the U.S. Department of Housing and Urban Development’s (HUD) Minimum Property Standards (MPS). These standards ensure the home is safe and structurally sound. The appraiser identifies conditions requiring repair before loan approval.

For instance, the appraiser will look for issues such as peeling lead-based paint, a non-functioning heating system, or a lack of handrails on staircases. If such conditions are found, they must be addressed and repaired to meet FHA requirements. This appraisal protects the FHA’s insurance fund and the lender’s interest.

The FHA Amendatory Clause

Unlike conventional loans where buyers might waive an appraisal contingency, a traditional waiver is not possible with FHA loans due to the mandatory FHA Amendatory Clause. This clause is a specific contractual provision protecting the buyer. It explicitly states that the buyer is not obligated to complete the purchase if the appraised value of the property is less than the agreed-upon purchase price.

This clause allows the buyer to withdraw from the contract without penalty, including the return of their earnest money deposit, if the appraisal comes in low. Both the buyer and seller must sign this clause, acknowledging its terms. While it prevents a buyer from being forced to pay more than the appraised value, the clause does allow the buyer to proceed if they choose to cover the difference between the appraised value and the purchase price out of their own funds.

Buyer and Seller Actions When Appraisal is Below Purchase Price

When an FHA appraisal comes in below the agreed-upon purchase price, both buyers and sellers have several paths forward, guided by the FHA Amendatory Clause. One option for the buyer is to proceed by bringing additional funds to closing. This covers the gap between the appraised value and the purchase price, with the buyer paying the difference out-of-pocket.

Alternatively, the buyer can engage in negotiations with the seller to adjust the purchase price. This might involve reducing the price to the appraised value, or finding a middle ground between the two figures. If an agreement cannot be reached and the buyer does not wish to pay the difference, the FHA Amendatory Clause allows contract cancellation. The buyer typically receives their earnest money back, assuming no other contractual breaches.

From the seller’s perspective, they can agree to lower the sales price to match the appraised value, which often keeps the transaction alive. The seller also has the option to refuse a price reduction. This decision would likely lead to the buyer exercising their right to cancel the contract under the Amendatory Clause. If the deal falls through, the seller may then need to re-list the property, potentially at a revised price or to attract a buyer with different financing.