Q: We represent the Seller; the Buyer’s Agent submitted an excellent, well over-asking price Offer with a Contingency Removal form that removed all contingencies. The Seller accepted that Offer without a Counteroffer. Neither I nor the Seller noticed that the first loan is a FHA loan. The Buyer’s Agent has now sent us the CAR FHA/VA Amendatory Clause Addendum (“FVAC) and she claims the Seller must sign it because the Seller has agreed that the Buyer can acquire the Property with federal financing. Is that true? Does the Seller have to sign the form?
If the Seller signs the FVAC, does the Buyer have a new appraisal contingency or does the fact that the Buyer removed all contingencies apply? Can the Seller counter out the quoted language in the FVAC? Since there is a strong possibility that the appraised value of the Property will be less than the purchase price, can the Seller counter the amount that the Buyer’s Agent has put into the FVAC and lower that amount to what the comps are showing for the Property?
A: Yes. The Seller must sign the FVAC form. When a Seller agrees to allow the Buyer to obtain either FHA or VA financing, the 2018 RPA specifies in Paragraph 3D (3) that:
“A FHA/VA amendatory clause (C.A.R. Form FVAC) shall be a part of this Agreement.”
This language obligates the Buyer and Seller to sign the FVAC form whether it was attached to the Offer or presented after the Contract was Accepted. This same language will also be included in the 2021 RPA in Paragraph 5C (4) and is required regardless of which contract form is used.
I. OBLIGATIONS OF THE FVAC FORM:
Part of the government requirements for obtaining either a FHA or VA loan is that the Property appraises at either the purchase price or an agreed-upon amount that is consistent with the government’s lending requirements for the amount of loan that is being sought. The federal government has created the mandatory language which is contained in the Amendatory Clause:
“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 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 Veterans Affairs, or a Direct Endorsement lender setting forth the appraised value of the property of not less than $_____________________. The purchaser shall have the privilege and option of proceeding with consummation of the contract without regard to the appraised valuation …”
The import of this language is that the Buyer has the ability, at the Buyer’s sole option, to cancel the transaction if the Property does not appraise at the purchase price or the amount specified in the FVAC form. This language supersedes any other language that is included in the Purchase
Contract. Thus, the fact that the Buyer has removed the appraisal contingency in the Offer is not relevant; the FVAC effectively gives the Buyer a new appraisal contingency that the Seller cannot demand be removed.
II. SELLER’S RIGHTS AND OPTIONS
If the Seller agrees to allow the Buyer to obtain FHA or VA financing, the Seller cannot counter out any or all of the Amendatory Clause language. If the original purchase agreement does not specify FHA or VA financing, the Seller is not obligated to agree to change the type of financing and is not obligated to sign the Amendatory Clause.
Unless the government lender agrees that an amount less than the purchase price can be included in the Amendatory Clause, attempting to counter out the amount specified in the Clause by the Buyer’s Agent will not be permissible.
The only thing that the Seller has control over is whether or not the Seller will agree to pay for or otherwise comply with any of the lender requirements specified in the CAR FHA or VA Notice and Addendum (“FVA”).
BEST PRACTICE TIPS:
- Seller’s Agents should carefully scrutinize the type of financing that is specified in each Buyer’s offer, regardless of which contract form is used. If the Buyer’s Offer specifies that the Buyer is obtaining either FHA or VA financing, the Seller needs to be advised of the requirements contained in the FVAC as well as the likelihood of lender required payments or obligations which will be specified in the FVA form.
- Buyer’s Agents should discuss the possibility of FHA or VA financing with their clients before preparing the Offer and if the Buyer has any intention of pursuing that type of financing, then the Buyer’s Agent should specify that option in the Purchase Agreement and include the FVAC form with any offer that includes FHA or VA financing.
- Some Buyers may want the amount inserted into the blank line in paragraph 1 of the FVAC to be the Purchase Price so that, if the appraisal comes in lower than that, the Buyers can then cancel the contract if it affects the lender’s loan commitment. However, if the Buyer wants to insert a lower dollar amount in that blank line, that Buyer’s Agent should check with the lender providing the FHA or VA loan before preparing the FVAC form so as to include an acceptable sum in the blank line as to the lowest amount that the Property can appraise for and still qualify for the federal financing. The blank line should not be left blank.
- If the Parties agree to increase the purchase price after the Amendatory Clause has been signed, the form requires that the Buyer and Seller agree to sign a new FVAC form before the Close of Escrow.
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