What happens when the VA value comes in below your price?
The deal doesn’t end on its own, and your earnest money isn’t automatically gone. VA’s regulation spells out a specific escape clause for this situation, and TREC’s Third Party Financing Addendum carries matching language for VA financing in Paragraph 4, which TREC labels the FHA/VA required provision.
Here’s what the clause says, in plain terms. If the contract price is more than the reasonable value the Department of Veterans Affairs establishes, you are not obligated to complete the purchase, and you won’t incur a penalty by forfeiting your earnest money. The same clause also says you have the option to go ahead with the purchase anyway, without regard to the VA value.
Read the whole appraisal report, not only the final value, because the comparable sales the appraiser used are what you’ll be talking about next. Note which sales were used, how far away they are and what adjustments were made, and bring those notes to your agent and your loan officer.
Put your dates on one page before you decide anything. Write down your option period deadline, your closing date and any loan deadlines your lender has given you, and ask your agent which of them a low value puts under pressure.
That leaves you three paths: walk away under the clause, go ahead, or try to close the gap with the seller. Each one has a cost, and the right one depends on how big the gap is, how much cash you have and how much you want the house.
Keep one thing straight. TREC’s resale and farm and ranch contracts both give a separate, unrestricted right to terminate during the option period you negotiated, as long as the option fee was paid on time and your notice of termination is given by 5:00 p.m. local time on the deadline. The escape clause is tied to the VA value instead. If the value comes back while you’re still inside the option period, ask your agent or a real estate attorney which right fits your situation and how to give notice. My post on earnest money in New Braunfels offers explains what you put at risk once you sign.
What does it cost to go ahead at the contract price?
Going ahead means covering the gap yourself. Federal law and VA’s regulation both say the VA-guaranteed loan can’t exceed the reasonable value of the property. VA’s regulation and TREC’s addendum both say that difference is paid in cash.
Before you agree to that, work through it with your loan officer:
- The gap. Subtract the VA value from the contract price.
- A revised cash-to-close estimate. Ask the lender for an updated estimate at the contract price, so you see the full amount you’d bring to closing, not just the gap by itself.
- Your reserves after closing. Ask what you’ll have left for moving, repairs and the first months in the house.
- Your paperwork. Ask what the lender will need to see about where the extra cash is coming from, and how long gathering it takes, so it doesn’t push back your closing date.
If the answer leaves you stretched, look hard at the other two paths. My guide to buyer closing costs in New Braunfels lists the costs that land on you at closing.
If the house also had issues you noticed during the option period, put those next to the appraisal before you decide how much more cash it’s worth to you. A gap you’d pay gladly on a house in good shape can look different on one that needs work you already planned to ask about.
How do you ask VA to look at the value again?
Ask your loan officer early, before the value is final if you can. A 2003 VA circular set out a procedure for this, and a 2017 circular calls it the Tidewater process. Under both, when the appraiser expected the value to come in below the sales price, the appraiser contacted a point of contact named on the appraisal request, who could send the appraiser more sales information.
Both circulars gave that contact 2 working days to send the additional information, in a format similar to the comparable sales grid on the appraisal report, with verification that each sale actually closed. Both also mention a reconsideration of value phase.
These circulars are older guidance, so treat their details as background and confirm how the process works now. Ask your loan officer three things:
- Who is listed as the point of contact on your appraisal request, so the right person gets the call.
- What VA allows today if the appraiser calls about a low value, and how quickly sales information has to go back.
- Whether a reconsideration of value is available after the value is issued, and what it would take.
Write the answers down with the date and who gave them, and share them with your agent. If the loan officer says a second look is possible, ask what it needs from you and by when, so you can line it up against your contract dates before you decide anything else.
This is where your agent earns their keep. If the appraiser calls, your agent should be ready with recent, closed New Braunfels sales and the paperwork that shows they closed. I’d rather have that conversation before the value is final than after.
Should you renegotiate, walk away or close the gap?
Start with the seller. You can ask the seller to lower the price to the VA value, to meet you partway or to help with other costs. Whether the seller agrees is their call, so don’t count on it.
Bring the appraisal into that conversation along with the value. If you share the VA value through your agent, share the sales the appraiser used too, so the seller’s side can see where the gap comes from. If the seller agrees to a lower price, get the change in writing and signed by both sides before you treat it as settled, and ask your loan officer what the new price changes in your loan amount and cash to close.
If the seller won’t move and the gap is more cash than you want to bring, the escape clause, if your contract includes it, says you aren’t obligated to complete the purchase or to forfeit your earnest money because of the VA value. Before you send any notice, confirm with your agent and, if needed, a real estate attorney how and when to send it under your contract.
If you love the house and have the cash, going ahead is your option too. Just do it with your eyes open about how much of your cushion it uses, and with the lender’s updated numbers in hand rather than an estimate from memory. Moving costs, the first repairs and the first few months of payments still have to come from somewhere after closing day.
Here’s the order I’d work through it:
- Get the numbers. The contract price, the VA value and the gap.
- Ask about a second look. Talk with your loan officer about what VA allows before and after the value is final.
- Talk to the seller. Share the VA value and the appraiser’s sales through your agent and ask about the price.
- Check your cash. Decide how much of the gap, if any, you can cover and still be comfortable after closing.
- Decide and document. Whatever you choose, put it in writing the way your contract requires, and keep copies of the appraisal, any notices and any signed changes together with your loan file.
If you’re also lining up a move on orders, my post on VA occupancy rules before a PCS covers the move-in side. For the rest of the buying process, start with the buyer resources.
