The Federal Housing Administration insures mortgages to give borrowers with lower credit scores or larger amounts of debt a chance to purchase a home. Although it's usually easier to qualify for an FHA mortgage than it is to qualify for a conventional loan, FHA still imposes many requirements on borrowers and lenders throughout the approval process. One such requirement is the signing of the FHA amendatory clause.
About the Amendatory Clause
The FHA amendatory clause is added to the sales contract when the buyer doesn't receive a copy of Form HUD-92800.5B, which discloses the home's appraised value, before signing. In such cases, FHA requires the lender to perform an appraisal to ensure that the home is worth enough to secure the requested loan. If the FHA amendatory clause is required, the borrower, any co-borrowers, seller, seller's agents and buyer's agents must sign the amendatory clause before the lender performs the appraisal.
One of the purposes of the FHA amendatory clause is to provide protection for buyers. The FHA amendatory clause says the buyer isn't legally required to proceed with the purchase if the appraisal returns a value lower than the price listed on the sales contract. The clause also says that, even if the appraised value is lower than the agreed-upon purchase price, the buyer can still go through with the purchase if he wants to. If the buyer decides not to follow through, the clause requires the seller to return the buyer's earnest money deposit.
Protections for FHA
The FHA amendatory clause provides protections for FHA by stating that the value listed on the lender's appraisal will determine the maximum loan amount the lender will provide. This prevents the lender from extending a loan with a balance higher than the value of the property that secures it, which in turn protects the FHA from losing money in the event of foreclosure.
Even though the FHA amendatory clause doesn't prohibit you from going through with the purchase of a home with a low appraisal, you may still be unable to do so if you don't have enough money. If you decide to move forward with the purchase, the clause requires your lender to lower your maximum loan amount, and you must cover the difference on your own by making a larger down payment. If you can't afford to put more money down, or if you aren't comfortable purchasing the home at the original price, you can negotiate a lower price or back out entirely.