FHA And FHA Amendatory Clause

Gustan Cho Associates

The Federal Housing Administration is part of the United States Department of Housing and Urban Development and was created back in 1934 to promote homeownership for hard working Americans with moderate income with less than perfect credit and minimal down payment become homeowners.  The Federal Housing Administration, also commonly referred to as FHA, is not a mortgage lender.  It is a government sponsored entity that insures mortgage loans to private mortgage lenders in the event of event and foreclosure.  In order for a mortgage lender to originate a FHA loan, they need to be FHA mortgage lenders and need to underwrite the FHA loan under FHA mortgage lending guidelines.  If the FHA mortgage lender does not adhere to the FHA lending guidelines, that loan cannot be insured by the Federal Housing Administration.  The Federal Housing Administration requires that all home buyers who purchase a home with a FHA insured mortgage loan that they a mandatory amendatory clause, known as the FHA Amendatory Clause, attached to the real estate purchase contract to minimize risks for FHA.  The FHA Amendatory Clause was created to help protect the home buyers interests in a real estate transaction.

FHA Loans 

The Department of Housing and Urban Development, also known as HUD, created the Federal Housing Administration in 1934 as part of the National Housing Act of 1934 in the Great Depression Era to promote homeownership and stimulate housing in the United States.  The function of the Federal Housing Administration, FHA, is to insure residential mortgage loans that has been originated and funded by FHA approved mortgage lenders and reimbursing these FHA approved mortgage lenders against mortgage loan borrowers who fail to repay their mortgage loan and go into default.  FHA charges mortgage insurance premiums on every loan they insure.  There is an upfront one time mortgage insurance premium and a ongoing lifetime annual FHA mortgage insurance premium.  The FHA mortgage insurance premium goes into a special FHA fund where it is used to pay out default against FHA insured mortgage loan borrowers who default on their loan.  FHA loans are extremely popular and over a third of mortgage loans originated in the United States are FHA insured mortgage loans.

FHA Amendatory Clause

The Federal Housing Administration requires that all real estate purchase contract have an amendatory clause known as the FHA Amendatory Clause.  The FHA Amendatory Clause was created to help minimize risk and protect the home buyer.  The FHA Amendatory Clause purpose is that it amends any part of the real estate purchase contract that contains verbiage that constitute that the home buyer forfeit the home purchase earnest money, penalizes, and/or require additional funds to close if the property does not appraise out at the original contract sales price.

FHA Loan Requirements

FHA will only lend up to 96.5% of the sales price and the sales price needs to be validated with the appraised value.  FHA requires that they have sufficient collateral on the property in the event of default.  If the property appraises lower, the contract needs to be amended to the lower appraised value and the mortgage lender will lend 96.5% of the amended price that is reflected on the appraisal.  In the event if the home buyer enters into a real estate purchase contract that is higher than the value of the home, the FHA Amendatory Clause protects the home buyer to cancel the real estate purchase transaction due to the FHA Amendatory Clause and renegotiate the real estate purchase price.  The home buyers, the home sellers, the home buyers real estate agents, and home sellers real estate agents needs to sign the FHA Amendatory Clause.  If the home buyer and home seller negotiates a new sales price due to the low appraisal, a separate FHA amendatory clause or another amendatory clause is not required.  FHA Amendatory Clause is not required for properties that are owned by the United States Department of Housing and Urban Development, HUD, or by mortgage lenders as well as home sales by Fannie Mae, Freddie Mac, VA, or properties that are not primary residence properties.
Related> When is the amendatory clause required?

Related> Mortgagee Letter on amendatory clause
The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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