Howdy!

My husband and I are closing on a new build soon. We are using a VA loan and all as been underwritten so all that is left is an appraisal. In the event the home appraises low (builder said it has never happened), what are our options? I know they can obviously lower the price or we can fork over money but who budges? Builder tells us we would pay the difference but I don't know. We have a contract for the agreed upon price but nothing saying we would pay the difference in the event of a low appraisal. Builder has known since day 1 that we are VA buyers. Thoughts?

The lender on a VA loan will finance 100% of the LESSOR of the price or appraisal value. So, if you the price (your construction loan payoff in this case) is 200k and the appraisal comes in at 195k, you can finance 195k. You would be responsible for the additional 5k out of your pocket. If you were already planning on putting some money down then it might just reduce your down payment but might not be anything additional out of pocket.

Does not help you at this point, but we do a VA one-time close program where one of the advantages is that the appraisal done before the construction starts is the only appraisal required. So that eliminates this potential issue. It is also only underwritten the one time which the builder likes as the borrower can not do something silly and not qualify in the end.

Thanks, Jay! Wish I knew about you a few months ago haha! I called the VA and they told me that all VA loans have an escape clause meaning if it does not appraise for the agreed amount, we can back out. Have you heard of this?

VA Loan Rules: The Mandatory Escape Clause

There are many questions about VA home loans, but not all of them come from the buyer's perspective. Sellers are also curious about the ins and outs of VA home loans. One particular question is important for buyers AND sellers, pertaining to the VA loan escape clause that allows a buyer to back out of a VA home loan agreement if the appraised value is lower than the sales price.

A common version of this question goes like this:

"I am a seller. What are my rights if I am not comfortable signing the escape clause? On my sales document, it states that the buyers can walk for whatever reason if the VA does not value the home appraised at the full buying price.I don't want to sign this document, what are MY rights as the seller?"

The Department of Veterans Affairs requires this "escape clause" as a safety margin for the VA loan applicant. The escape clause protects the buyer from being obligated to a VA mortgage loan when the appraised value of the home does not match the sales price.

The escape clause is in essence, the following:

"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 or 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 escape clause is needed because VA will not guaranty loan amounts that exceed the appraised value of the home plus any allowable add-ons to the loan amount.

In cases where the appraisal value is lower than the asking price, the borrower would be required to pay the difference in cash if he or she wanted to proceed with the home loan anyway.

But there are those who can't or won't not pay that difference out of pocket. The escape clause is required to prevent the borrower from being forced into a loan they can't afford or don't want.

Buyers and sellers alike should know that the VA loan escape clause is non-negotiable--in fact, the VA requires any sales contract that does not contain the clause to be amended for its inclusion as a requirement of loan approval.

Sellers have the right to re-negotiate many terms of the sale, including seller concessions, asking price, etc. Sellers are free to de-list the property or refuse to sell based on price or other factors in the negotiation as long as Fair Housing laws or binding legal agreements
are not violated. But the VA loan escape clause is required by law and cannot be omitted or redefined.

sounds like you're OK. WIth new construction, appriasiers typically aren't an issue. Especially if it's a larger builder that has history in teh neighborhood.

This is why many people don't like VA loans by the way. Too much uncertainty.

Thanks, everyone! All is well in the world...appraisal came in $650 ABOVE selling price. Closing on it today, woo hoo!!

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Thanks, everyone! All is well in the world...appraisal came in $650 ABOVE selling price. Closing on it today, woo hoo!!

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Good deal. Enjoy your new home.

Sorry, looks like I forgot to check back on on this thread in a timely manner but congrats on your closing!

Just an FYI, and maybe it will help someone else, since your situation turned out well.

Routinely, the builder will know if the house is going to appraise with the right value or not based on how you are building the home. I am referring to the amount of upgrade dollars you want put into the home.

Example: If you are putting in $60K in upgrades, and the average in the neighborhood is $30k, and the highest one they have built so far is say $40k, you pretty much know before you even start that the home has little chance to appraise at the higher value. Most builders will try to persuade you to lower the amount of $$$ you want to put in the home, and tell you it's in the best interest of all to add some of the things you want after you close. In my experience, some upgrades will usually bring value, regardless--usually structural options; Examples: 3 car garages & garage extensions, fireplaces, room options like bonus rooms, or additional bedrooms off bonus rooms.

I have closed folks many times where they/we KNEW there was no chance the home would appraise, and they were willing to pay a down payment, or a larger down payment, just so they could have the home they want. Most builders in this scenario will ask for up-front, non refundable deposits for upgrades in this situation. If you are reasonably sure this is a long term investment for you, there's absolutely nothing wrong with this approach. If you know you won't be in the home very long, this may not be the best approach from a financial standpoint, as you likely will not get your investment back on resale.

Hope this helps