Wording and requirements may vary from state to state, but a real estate sales contract essentially protects both parties in the transaction. The contract is padded with contingencies (out clauses, FYI) that allow parties to back out of the sale if certain conditions are not met. Buyer doesn’t get financing within X amount of days. Seller can back out. A home inspection uncovers black mold throughout the home. (Ewwww!) Buyer can back out.
The option clause allows the buyer to walk from the contract within a specific time frame should there be any issues with the appraised value.
When you finance a home purchase with a VA home loan, you will encounter what’s call the VA option clause (also called an “escape clause”). The option clause allows the buyer to walk from the contract within a specific time frame should there be any issues with the appraised value.
How so? Say, for example, a couple prepares to buy a home listed at $250,000. They settle on a price of $245,000 with the sellers. A purchase agreement, which includes a VA option clause, is drawn up and signed by both parties, and the buyers place an earnest money deposit in escrow to show their good faith. The lender orders a VA appraisal and soon receives the Notice of Value (NOV), VA language for appraisal. And, then, *fireworks*. The appraiser cannot support the sales price of $245,000; he or she can only get to $235,000 based on recent sales of similar homes in the area. The lender uses the lower of the two prices to determine the loan amount, which leaves the buyers $10,000 short.
The buyers go back to the sellers and attempt to renegotiate. The sellers say hella no. If the buyers want the house, they’ll have to come to the closing table with the difference between the sales price and appraised value. According to the appraisal, the house is way overpriced. Yet if the buyers walk away from the deal entirely they’ll also lose their earnest money deposit. Or will they? Because there is an option clause included in the contract, they can not only cancel the sale but also get their deposit returned to them.
The option clause is a required element of the sales contract, and cannot be omitted or edited in any way. Without it, VA won’t guarantee the loan. Along with this option clause, VA also suggests that buyers include an escape clause that protects them should VA-backed financing fall through.