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VA Escape Clause
Regulatory requirements stipulate that a Loan Guaranty Certificate may not be issued for a loan to finance a contract that was signed prior to the Veteran’s receipt of the notice of value (NOV), unless the contract includes, or is amended to include, the following “escape” clause:
“It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs.”
Frequently Asked Questions
- What loan types require our Escape Clause?
The Escape Clause must be signed by the Veteran buyer and the seller on all VA-guaranteed purchase transactions if the sales contract was signed by the Veteran prior to receipt of the NOV. This includes contracts on new construction. If the VA Escape Clause is not contained within the contract, the contract must be amended to include the clause prior to close. It is the lender’s responsibility to ensure the clause is in the sales contract prior to close. - What does the VA Escape Clause do?
In the event the reasonable value established by VA is less than the contracted purchase price, the VA Escape Clause provides a mechanism for the Veteran buyer to:
- negotiate with the seller to reduce the purchase price, or
- proceed with the transaction at the contracted price by making a down payment in the amount of the difference, or
- exit the transaction without forfeiture of earnest money deposits.
If the Veteran chooses to exit the transaction because the sales price exceeds the reasonable value as established by VA, all earnest money deposits must be returned to the Veteran - What doesn't the VA Escape Clause do?
It cannot be invoked to terminate a contract to purchase for a reason other than an appraised value below the contract price. - What about deposits made for customer preference items on a new build?
Deposits made for upgrades on a contract for new construction are not considered earnest money and the builder is not required to refund them. - How can VA help a Veteran get their earnest money deposit back?
VA can provide guidance to stakeholders such as title companies and real estate agents on the Escape Clause and the refundability of the earnest money. Title companies or other entities holding money in escrow for the benefit of the buyer and seller would be required to distribute funds based on the contract terms. If the contract is terminated due to the valuation of the property and the Veteran invokes the escape clause, the company holding the funds would be required to return them. VA cannot get involved in civil disputes and do not provide legal counsel.
