With few exceptions, parties to a real estate contract can mutually agree to terms of the contract. However, certain laws and requirements may prevent parties from agreeing to certain contractual provisions, even if both parties are in agreement. Some examples are the buyer’s choice of settlement agent or the buyer’s right to cancel under the Property Owner’s Association Act.

May a buyer waive their appraisal contingency for a Federal Housing Administration (“FHA”) loan?

The FHA was created by Congress in 1934 amid the Great Depression. To stimulate the housing market, the government created a federally insured loan program to reduce lender risk and make it easier for borrowers to qualify for home loans. The FHA doesn’t actually lend money, rather, borrowers work with FHA-approved lenders who make the loans. The FHA guarantees those loans, which guarantee is paid for by borrowers through mortgage insurance payments.

Pursuant to regulation and underwriting guidelines, an Amendatory Clause must be included in the sales contract when the borrower has not been informed of the appraised value by receiving a copy of Form HUD-92800.5B before signing the sales contract. The amendatory clause must contain the following language:

“It is expressly agreed that notwithstanding any other provisions of this contract, the purchaser shall not be obligated to complete the purchase of the property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise unless the purchaser has been given in accordance with HUD/FHA or VA requirements a written statement by the Federal Housing Commissioner, Department of Veteran’s Affairs, or a Direct Endorsement lender setting forth the appraised value of the property of not less than $ [sales price]”. [emphasis added].”

The italicized language makes clear that the purchaser shall not be obligated to complete the purchase in the event of a low appraisal, even if other provisions of the contract attempt to waive the appraisal contingency. Given the brief background as stated above, one can see why FHA would require this protection for both the buyer and itself. As FHA guarantees these loans, it is important that lenders not provide financing without adequate security and consequently put the FHA at both greater default risk as well as an increased chance of being under secured.

So, while parties are generally free to mutually agree to terms of a contract, this is not one of them. Incidentally, the Amendatory Clause is required on VA loans as well.