Must the Due Diligence Fee be refunded if the buyer terminates because of a low FHA appraisal?

QUESTION: One of my listings is under contract with an executed FHA/VA Financing Addendum (Form 2A4-T). The buyer was seeking an FHA loan, but the appraisal came in below the purchase price and now the buyer wants to terminate. The buyer paid the Due Diligence Fee required by the contract, and the buyer agent is claiming that the language in Form 2A4-T requires that the seller refund the Due Diligence Fee if the buyer terminates. I thought only the Earnest Money Deposit is refundable if the appraisal comes in low. Is the buyer agent correct?

ANSWER: No. The FHA amendatory clause in Form 2A4-T, which is required by federal law, provides in relevant part: “It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not be obligated to complete the purchase of the property described herein or to incur any penalty [by] forfeiture of earnest money deposits or otherwise unless the purchaser has been given . . . a written statement . . . setting forth the appraised value of the property of not less than $_______________________.” The italicized portion of the amendatory clause is often what a terminating buyer relies on to argue that their Due Diligence Fee should be refunded.

Form 2-T defines the Due Diligence Fee as a “negotiated amount, if any, paid by Buyer to Seller with this Contract for Buyer’s right to terminate the Contract for any reason or no reason during the Due Diligence Period.” The Due Diligence Fee therefore must be paid, if one is specified in the contract, in order for the buyer to preserve their right to terminate. In your case, the buyer has been able to exercise the right they paid for to inspect the property and terminate if they wish. Since the buyer received this benefit, it does not seem likely that the seller’s retention of the Due Diligence Fee would be a “penalty.”

Several years ago, we spoke to a HUD representative on this issue. They informally told us that they agreed with the above conclusion. We are not aware of any other written guidance from HUD characterizing the seller’s keeping the Due Diligence Fee as a “penalty” when the appraisal comes in low and the buyer terminates.

It is worth noting that though this question is about the FHA amendatory clause, the VA amendatory clause is substantially similar. We would come to the same answer if the question was about a VA loan instead. Brokers who represent a buyer who wishes to seek a refund of their Due Diligence Fee in these circumstances should recommend their client seek legal counsel.