The Department of Housing and Urban Development's Federal Housing Administration insures mortgages for lower-income homebuyers. This insurance gives the lender confidence to offer more terms that are more advantageous to the buyer, such as low closing costs and a smaller down payment.
The FHA has a form for the lender to provide to the borrower that informs the borrower of the appraised value of the home he's buying. If the lender doesn't provide that form to the borrower before he signs the sales contract, an amendatory clause must be included in the sales contract. The appraised value in turn determines the maximum mortgage amount HUD will insure. HUD doesn't require an amendatory clause in some circumstances, such as when the seller or lender is a federal, state or local government agency.
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The clause states that if the buyer doesn't receive a written statement setting the appraised value of the home as at least the same amount as the sale price stated in the contract, he can cancel the contract without any penalties. The buyer also has the option of signing the contract and going through with the sale regardless of the appraised value of the home.
If the appraised value turns out to be less than the sales price, the buyer and lender may agree to lower the sales price. In this case, a new amendatory clause isn't required, but they must include the original contract in the package of documents that accompany the revised contract.