If you are using your Veterans Affairs (VA) loan to buy a home, part of that process will include signing a purchase agreement between you and the seller. That’s an exciting step—as exciting as executing legal documents can be, that is. It brings you one step closer to closing on your loan and picking up the keys to your home.
But before you sign on that dotted line, it’s important to understand what goes into VA loan purchase agreements. They are not dissimilar from purchase agreements for buyers using conventional loans, but there are some key differences to be aware of. In this article, we will provide a look into purchase agreements for VA buyers.
What is a purchase agreement?
A VA loan purchase agreement, as with other real estate purchase agreements, is a binding legal document that lays out the agreed-upon terms and conditions between a buyer and seller for a real estate transaction—in this case a VA home purchase. Generally, this contract is the result of negotiations between the buyer and seller and their respective agents.
Once both parties are satisfied with the terms that must be met for the sale to close, they will sign the contract, and the buyer will present this contract to their lender. Then, several steps will be taken, including, for instance, the VA appraisal process, in which the lender arranges for a VA appraiser to determine whether the agreed-upon price is commensurate with the actual value of the home.
That appraisal process is mandated by the VA for eligible veterans using their VA loan benefits, but a home inspection is not. Still, it is generally recommended that buyers have a home inspection done after signing the purchase agreement to identify any significant issues with the home.
Who prepares the purchase agreement?
The buyer or seller, and their representatives, can prepare the purchase agreement. Since the purchase agreement is a legal document, it is usually first drafted by a lawyer, often as a template to be used by the buyer’s real estate agent.
Technically, anyone is allowed to draft this document, but it is highly recommended that you do not do this without the help of a qualified legal professional. For such an important and complex transaction, it’s best to ensure accuracy in the language of your legal documents.
What is included in a purchase agreement?
There are some common items VA homebuyers can expect to see in a purchase agreement. Of course, this list is not exhaustive. Work with your real estate agent to determine whether your purchase agreement has all the necessary terms included for your VA home purchase. Typically, you can expect to see the following:
- Purchase Price: The complete selling price for the property as agreed upon by the parties. This would include any additional costs beyond just the price of the home.
- Earnest Money: Otherwise known as a good faith deposit, this money is an incentive for the seller to take the home off the market while negotiating the purchase agreement. In a seller’s market, increasing your earnest money deposit can help you stand out from other buyers.
- Inclusions: These outline specifically what the seller is willing to leave in the home, as it pertains to appliances, fixtures, and other items.
- Contingencies: These cover any conditions that must be met before the final sale of the property. Often that includes things like home repairs, inspections, and in the case of a VA loan purchase, VA appraisals.
- Closing Costs: In the purchase agreement, closing costs are listed as an estimate of total costs expected upon closing. The specific closing costs will be outlined in the closing statement.
- Closing Date: This is the final date by which the ownership of the property would be transferred to the buyer in exchange for money from the buyer.
Of course, the purchase agreement would also include information about the buyer and seller, as well as details about the property, among other items.
What is the VA Escape Clause?
The VA Escape Clause is a required inclusion in purchase agreements for homebuyers using VA loans. Both the buyer and seller must sign the purchase agreement with the Escape Clause to be able to close on the loan, and it is the lender’s responsibility to ensure the clause is in the contract prior to closing. You can find the specific language for the amendment here.
Now, what does the Escape Clause do? If the reasonable value of the home determined by the VA appraiser is less than the contracted purchase price, this clause allows veterans to:
- Negotiate with the seller to reduce the purchase price.
- Follow through with the transaction at the agreed upon price by supplementing the difference with a down payment.
- Exit the transaction without forfeiting earnest money deposits.
The VA Escape Clause, however, cannot be used to get out of your contract for reasons other than the aforementioned appraisal price discrepancies. So, if you pull out of the transaction for reasons not outlined in the VA Escape Clause, you risk forfeiting your earnest money.
What are some important contingencies for VA buyers?
The contingencies listed in a VA loan purchase agreement can vary widely from one situation to the next. For buyers using their VA benefits, an appraisal contingency must be included. However, there are some other common contingencies that appear in many purchase agreements.
Financing Clause
Usually, a financing clause is added to a purchase agreement to allow the buyer out of their offer if they cannot secure financing.
Inspection Clause
The inspection clause ensures the buyer can hire a home inspector to determine the condition of the property. If the condition is not satisfactory, as defined by the agreement, the buyer can back out of the sale.
Final Walk Through
The final walk through is an opportunity for the buyer to take one last look at the property to make sure there have been no unagreed upon alterations or major degradations in the property since their offer was made.
Sale of Current Property
This clause makes the buyer’s offer contingent upon their ability to first sell their current home. If you are a VA buyer looking to access your full entitlement, this might be an important clause to include in the agreement.
Final Thoughts
Purchase agreements are an important and exciting step in the VA home purchase process. They are designed to protect both the buyer and seller as they embark on a complex real estate transaction. By understanding the basic elements of a purchase agreement, VA homebuyers can better prepare themselves when it comes time to execute their agreement. Be sure to work with a trustworthy real estate agent, ideally with experience in the VA loan purchase process, to help you navigate this step.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
