You found the right house in Dallas, but then a VA appraisal came in low, and your dream house is in jeopardy. Now, you’re stressing about losing your earnest money or being forced to pay thousands of dollars out of pocket. With DFW real estate being so competitive, we know how often our military families are pushed to offer more than a house is worth.
Thankfully, there’s a powerful, federal VA Escape Clause built into every Texas contract that will give you the final word – and your deposit – if a VA appraisal comes in low. So how do you activate it to protect your wallet, without walking away from the deal altogether? This guide breaks it all down.
What Is The VA Escape Clause In Texas?
This federal contract protection protects veterans from paying more than the property’s VA-determined reasonable value. So before you sign that purchase agreement, get to know this protective law in simple terms.
What Does The VA Escape Clause Mean In Plain English?
In simple terms, the VA Escape Clause is a contract addendum that makes sure you don’t lose your money if the house appraisal comes in lower than what you signed a contract to pay for it. The reason why is this:
According to the VA, these lenders are prohibited from approving you for a loan if it is higher than the fair market value of the house. This clause essentially makes it possible for you to walk away from your contract without penalty if the contract price is higher than the “reasonable value” assigned to the house by the Department of Veterans Affairs.
In fact, it’s officially called the VA Amendatory Clause, or VA Amendment to Contract, and it will always require that your entire earnest money deposit be returned.
Can A Texas VA Buyer Or Seller Waive The VA Escape Clause?
Unfortunately, this is one clause that neither a buyer nor a seller can remove. Even if you signed a tailored appraisal gap addendum that addresses this situation, federal law will not enforce a clause that goes against VA guidelines.
In fact, if your VA lender does not have the buyer and seller initial the escape clause, they cannot close on a VA guaranteed loan. So if you have a seller or listing agent asking you to initial off on that addendum, you can rest assured the lender won’t approve it and that your cash to close will not be lost!
When Does the VA Escape Clause Protect a Veteran’s Earnest Money?
Let’s go over the timing of these funds and the events during which this safeguard applies. And what will happen to the deposit after it comes into “under-collateralized”?
What Triggers The VA Escape Clause After The Appraisal?
When your VA appraiser puts together an appraisal report that shows an appraised value below your purchase price, a clause kicks in. That appraisal is reviewed by a Staff Appraisal Reviewer (SAR) at your VA lender.
The maximum loan amount the lender will go forward with is determined by when your lender releases a Notice of Value (NOV). If your VA appraisal comes in below your contract purchase price, your appraisal contingency is activated.
What Happens To Earnest Money If The VA Appraisal Comes In Low?
What happens if the VA appraisal comes in low? You receive a 100% refund of your earnest money, and you are free to cancel your VA home purchase contract.
When you notify the seller of the low VA appraisal, the title company returns your earnest money. The seller is not entitled to your money, nor is the escrow company allowed to keep your earnest money.
Does A Low VA Appraisal Automatically Cancel The Texas Contract?
No, a low appraisal does not void the contract, but it gives you the right to terminate it. If you still want to purchase the house, that’s still an option. But you will need to figure out what to do about the appraisal gap, and then the lender can’t close your loan.
What Choices Does A Texas VA Buyer Have After A Low Appraisal?
You still have options even if your DFW home appraisal comes in low. You can fight for the sale, or you can get out with no hard feelings. If the appraisal value is still low, you and your seller can negotiate different terms:
- Seller Lowers the Price: You can ask your seller to renegotiate terms of your purchase agreement based on the VA appraisal. Most sellers would rather lower the sale price and keep the sale on track than lose a buyer and relist the property.
- Buyer Pays the Difference: You can bring the difference between the appraised value and the purchase price to the table. You will need to bring in the cash difference at closing, in addition to your down payment, using gift money, your own cash, or money you’ve borrowed (the lender must verify the source of this cash).
- Split the Gap: You can split the difference with your seller. The seller will drop the price of the home halfway, and you’ll make up the rest in cash.
- Use Seller Concessions: If your seller isn’t willing to drop the sale price, they can offer up to 4% in seller concessions. This concession can offset your closing costs and allow you to put that cash towards closing the appraisal gap.
Should The Buyer Try Tidewater Or Reconsideration Of Value Before Walking Away?
Well, yes, you will do this first. If your VA appraiser has doubts that the value isn’t quite right, they may invoke the Tidewater Initiative. The appraiser then sends out a Tidewater Notice to your loan officer, giving your real estate agent two business days to turn over closed and pending sales from the past six months.
If that doesn’t work, you may request a formal Reconsideration of Value (ROV) from the VA Regional Loan Center. Your loan officer and your agent can then send a packet to the VA, highlighting errors such as square footage discrepancies, a lack of comparable sales, or renovations with supporting receipts.
Where Is The VA Escape Clause Handled In Texas Contracts?
Buyers often believe a custom addendum is necessary, but Texas’s standard contract already protects you! Your Texas real estate agent will not use a separate addendum to do so. Rather, the Texas Real Estate Commission (TREC) embeds the federal language directly in Section 4 of TREC’s Third-Party Financing Addendum. When VA financing is requested, your buyer’s agent checks the box to add VA financing, thereby obligating both parties to the federal escape clause and protecting your earnest money deposit the minute you sign.
What Does The VA Escape Clause Not Protect In Texas?
But this contingency has limitations. You should plan for non-refundable out-of-pocket costs.
The escape clause only covers your earnest money. It doesn’t refund what you pay third-party vendors involved in the transaction. If you cancel the contract, you can’t get your home inspection fees, VA appraisal, or credit report fees back.
You also won’t get back your Texas option fee. The escape clause does not cover the option fee, which is non-refundable to the seller for the unrestricted right to terminate.
When Does the VA Escape Clause Protect You?
| Situation | Protected by the VA Escape Clause? | Notes |
| VA appraisal comes in below the purchase price | Yes | Buyer may terminate the contract and generally recover earnest money. |
| Buyer changes their mind | No | The clause does not cover buyer remorse. |
| Home inspection reveals issues | No | Inspection contingencies are separate from the VA Escape Clause. |
| Financing is denied for another reason. | Depends | This depends on the financing contingency in the purchase contract. |
| Option period cancellation | No | Texas option rights operate independently of the VA Escape Clause. |
How Can DFW Veterans Use The VA Escape Clause Strategically Before Making An Offer?
Wise buyers do not leave themselves open to receiving a low appraisal. You can employ this federal protection tool strategically with your Realtor when making an offer.
How Can A VA-Savvy Realtor Reduce Low-Appraisal Risk Before You Sign The Contract?
Your VA-ready Realtor does this research on the neighborhood’s market before you ever make an offer. They review MLS comps, current listings, and recent sales in Frisco, McKinney, and Fort Worth, Texas. By using this data, you will have an offer that will be competitive and also make sense, thereby limiting your chances of a low appraisal.
What Questions Should Veteran Buyers Ask Before Signing A Texas VA Contract?
Before you sign on the dotted line, here are the questions to ask your buyer’s agent and loan officer:
1. Is our TREC Third-Party Financing Addendum signed, with the VA box checked?
2. Do the surrounding MLS comps justify the offer price we have settled on?
3. What is our timeframe for turning in Tidewater comps if the appraiser reports the value as too low?
4. What does our contract say if a new-construction home comes up short on value relative to builder design deposits?
Key Mistakes Veterans Should Avoid When Using the VA Escape Clause
- When The Clause Automatically Cancels The Contract: A low appraisal may give you the right to cancel the contract; however, the contract will not be cancelled automatically. It is required that the correct people are notified and the contract is processed accordingly.
- Confusing The VA Escape Clause With The Option Period (Texas): While the VA Escape Clause allows you to cancel the contract if the appraisal comes in lower than the sale price, the option period allows you to cancel for many more reasons for a set period of time.
- Bidding Substantially Over the List Price without Seeing Comparable Sales: When you bid well over recent comparable sales, it’s almost guaranteed that the appraisal will come in low, and that you’ll run into more issues.
- Failing To Discuss Your Options Immediately When a Low Appraisal Occurs: When a low appraisal occurs, call your loan officer and your real estate agent to discuss your options, such as price renegotiation, the Tidewater Initiative, or Reconsideration of Value.
- Assuming Seller Concessions Pay The Appraisal Gap: Seller concessions cannot directly pay an appraisal gap. However, by covering eligible closing costs, they may free up more of the buyer’s available cash to contribute toward the difference.
Need Help Making A Strong VA Offer Without Risking Your Earnest Money?
When it comes to DFW real estate, you need local know-how. You need to work with someone who understands the ins and outs of serving the veteran community. That’s where Ginger Varga comes in.
As a leading VA-friendly realtor in DFW, she brings the right know-how to help military families understand and conquer the Texas real estate market.
She will look over your MLS comps with you, negotiate for you during Tidewater, and fight to protect your cash-to-close with the seller. You worry about moving and let her worry about the paperwork. Contact her for a free home buying consultation.
VA Escape Clause in Texas: FAQ
How Is Earnest Money Different From The Option Fee In A Texas VA Purchase?
A good-faith deposit is held in escrow and will be returned to you if you cancel under the VA Escape Clause. The option fee is a non-refundable payment made directly to the seller for an unconditional right to cancel.
Can A VA Buyer Recover Inspection, Appraisal, Or Credit Report Fees After Cancelling?
No, you can’t get this money back. All you can get back is the VA Escape Clause, which protects your deposit money. Other costs, like home inspections, appraisals, and credit checks, you’ll still have to pay for. You’ve paid for services received.
What Should A Veteran Do If The Seller Refuses To Sign The Earnest Money Release?
Your buyer’s agent or loan officer needs to hand the signed TREC Third Party Financing Addendum to the title company immediately. The escrow dispute is void because Federal law wins. Your title company will return your earnest money.
Does Invoking the VA Escape Clause Hurt the Buyer’s VA Entitlement?
No, referencing the clause doesn’t affect your Certificate of Eligibility (COE) and VA entitlement. You haven’t purchased anything, so you are still entitled to the full VA loan benefit, meaning you can go out and buy another Texas home tomorrow!
Does The VA Escape Clause Apply To VA Refinances?
No. The exit clause only works for home buying deals, meaning that both parties – the buyer and the seller – would sign a purchase agreement. The clause is invalid for IRRRL and VA cash-out refinance loans.
Can You Use Seller Concessions To Solve A VA Appraisal Gap?
Yes, you can use up to 4% of the loan amount in seller concessions to cover your closing costs and prepaids, giving you the cash to pay the appraisal gap out of pocket.
What Happens If An Appraisal Delay Pushes Back Your Closing Date?
Sometimes the appraisal delay can cause your mortgage rate lock to expire. Your loan officer should try to extend the rate lock with the VA lender, and the buyer’s agent should draft a contract amendment to extend the closing.
Can A New Lender Use Your Existing VA Appraisal Value?
That’s right, your VA appraisal will remain valid on the property for six months. So if you decide to refinance with another VA lender, they can pull the same appraised value through VA’s online portal.
How Should PCS or Military Relocation Timelines Affect the Buyer’s Decision after a Low Appraisal?
If you’re operating on limited time during a PCS move, time is of the essence. If you don’t have the luxury to wait two weeks for a Tidewater or ROV appeal, the fastest way out is to invoke your escape clause and begin your housing search immediately.
What Documents Should A Buyer Keep If They Invoke The VA Escape Clause?
For your files, always hold onto your executed purchase agreement, your Notice of Value (NOV) from the low appraisal, your written cancellation letter, including a reference to the escape clause, and the executed earnest money release from your title company.
Should PCS Buyers Build Extra Appraisal Time Into The Contract?
You’re probably thinking, yes, PCSing military families need two more weeks tacked on to their PCS home purchase. Negotiating the low VA appraisal on the back of the Tidewater Initiative or a full appeal could delay closing and expire your rate lock.
Who Pays For The VA Appraisal If The Deal Falls Apart?
This fee is paid by the buyer at closing. The VA escape clause will not allow the refund of the appraisal fee. But you will have the assurance of no liability in the transaction, and you will also be refunded any earnest money you have put in the sale.
