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The FHA Amendatory Clause helps to protect homebuyer interests.
The Federal Housing Administration (FHA) is an integral part of the housing market because it allows borrowers with lower to moderate incomes and minimal down payments to achieve the "American Dream" of home ownership. Overseen by the Department of Housing and Urban Development (HUD), FHA gives lenders the confidence to loan money to this demographic by insuring the mortgage in the event the homeowner defaults. FHA minimizes risk with an amendatory clause to the sales contract.
The National Housing Act of 1934
Created the FHA in the wake of the Great Depression. FHA insures mortgages originated by approved lenders, guaranteeing reimbursement should the homeowner fail to repay the debt or struggle with payments. Borrowers pay an up-front premium and monthly mortgage insurance fees that comprise the FHA insurance pool of funds. Since the subprime mortgage market failed in 2007, borrower reliance on FHA has grown rapidly. As of August 2012, FHA loans constitute one-third of home loans.
FHA requires an amendatory clause be made part of the sales contract to purchase a home. Typically known as the FHA Amendatory Clause/Real Estate Certification Form, the document's verbiage amends any aspect of the sales contract that may require a buyer to forfeit earnest money, pay a penalty, or contribute additional funds to close in the event a property fails to appraise at the contract sales price.
When purchasing a home with an FHA loan, the lender must ensure that the property serves as sufficient collateral for the amount it lends. An FHA appraisal determines the home's value. Should a borrower enter into a contract for an amount above the home's value, the buyer may back out of the transaction or renegotiate the sales price because of the amendatory clause. Buyer, seller and real estate agent signatures are required on the form.
Should the buyer and seller choose to revise the sales price, a separate amendatory clause for the new price is not required. The clause is not required for certain property types, such as real estate owned by HUD or lenders; sales by Fannie Mae, Freddie Mac, the Department of Veteran's Affairs; or properties not intended for owner-occupants.