What we verified in “Bidding wars: appraisal gaps and escalation clauses”

Statements and where we checked them

The statements with rules, figures or dates, with the exact place in the source and the date we checked them.

1. In Fannie Mae's Selling Guide, for a purchase, the loan-to-value ratio is the loan amount divided by the property value, and that value is the lower of the sales price or the current appraised value.

   Sources 1 · Selling Guide B2-1.2-01, Loan-to-Value (LTV) Ratios: 'Purchase money transactions Divide the original loan amount by the property value. (The property value is the lower of the sales price or the current appraised value.)' · Checked October 31, 2026

2. According to HUD Handbook 4000.1, under most FHA programs the maximum mortgage is the lesser of the area limit or a percentage of the adjusted value; for a purchase, the adjusted value is the lesser of the purchase price (less inducements to purchase) or the property value.

   Sources 2 · Handbook 4000.1 (last revised August 12, 2026), II.A.2.a, 'Maximum Mortgage Amounts', p. 177: 'the maximum Mortgage is the lesser of the Nationwide Mortgage Limit for the area, or a percentage of the Adjusted Value'; 'For purchase transactions, the Adjusted Value is the lesser of: purchase price less any inducements to purchase; or the Property Value' · Checked October 31, 2026

3. According to the CFPB, it is very risky to buy a home for more than the appraised value; you can often use the lower appraisal to negotiate a price reduction, because it is strong evidence the price was above market value; if the seller will not lower the price, you may want to cancel; depending on your contract, canceling may have costs, but they are likely small compared to buying a home that is not worth what you paid.

   Sources 3 · My appraisal is less than the sale price. What does that mean for me? (last reviewed September 11, 2024): 'It is very risky to purchase a home for more than the appraised value'; 'You can often use the lower appraised value to negotiate a reduction in the sales price'; 'The appraisal is strong evidence that the price was above the market value'; 'If the seller won't reduce the price on the home, you may want to cancel the sale'; 'Depending on the terms of your purchase contract, there may be costs associated with cancelling the sale. However, these costs are likely small compared to buying a home that isn't worth what you paid for it' · Checked October 31, 2026

4. According to Fannie Mae, the lender must give the appraiser a copy of the complete, ratified sales contract with all addenda; and if the contract is amended after the appraisal in a way that does not change the property description, such as the price, no revised appraisal is required.

   Sources 4 · Selling Guide B4-1.1-05, Disclosure of Information to Appraisers (06/04/2025): 'the lender must provide, or ensure that the appraiser is provided with, a copy of the complete, ratified sales contract and all addenda'; 'If the contract is amended after the effective date of the appraisal in a way that does not affect the description of the property, then the lender is not required to provide the amended contract to the appraiser nor obtain a revised appraisal'; 'sale price' · Checked October 31, 2026

5. According to the North Carolina Real Estate Commission, an escalation clause is one in which a buyer says they will pay a specific amount more than the highest competing offer, with or without a maximum; the Commission discourages their use; the risks include paying much more than you wanted if there is no cap, the seller learning your top price if there is one, the offer not being enforceable until a specific price is entered, and the seller inventing a fake offer to drive up the price; brokers may not draft them; and the seller's best response is usually to ask all buyers for their highest and best offers.

   Sources 5 · The Pitfalls of Using Escalation Clauses (June 2022 bulletin): 'An escalation clause is one in which a prospective buyer expresses their willingness to pay a specific amount more than the highest competing buyer'; 'may or may not indicate a maximum amount'; 'The Commission discourages the use of escalation clauses'; 'the buyer may end up paying much more for the property than desired'; 'the seller will immediately know the buyer’s top price'; 'may not become enforceable until a specific price is entered into the contract'; 'The seller may fabricate a fictitious offer'; 'Real estate brokers are prohibited from drafting escalation clauses'; 'invite all buyers to make their highest and best offers' · Checked October 31, 2026

6. Under North Carolina Real Estate Commission Rule A .0115, a broker may not disclose the price or other material terms of a party's offer to a competing party without the express authority of the party who made the offer.

   Sources 5 · The Pitfalls of Using Escalation Clauses: 'Commission Rule A .0115 reads as follows: “A broker shall not disclose the price or other material terms contained in a party’s offer to purchase, sell, lease, rent, or to option real property to a competing party without the express authority of the offering party.”' · Checked October 31, 2026

7. According to the Texas Real Estate Commission, in a hot market it is common for a buyer to want an escalation clause (for example, paying a set amount more than the highest offer); a real estate contract is a legal document and any change can affect the buyer's and seller's rights; and a license holder may not draft or add language that defines or affects the parties' rights, obligations or remedies, such as an escalation clause, because that is the unauthorized practice of law (Rule 537.11(b)(5)).

   Sources 6 · Escalating to Trouble (TREC, October 5, 2021): 'it is not uncommon for a buyer to want an escalation clause added to the contract'; 'X amount more than the highest offer if other offers are present'; 'a real estate contract is a legal document and any changes to the contract can impact the rights of the parties'; 'A license holder cannot draft an addendum or add language to the contract that defines or affects the rights, obligations, or remedies of the parties'; 'TREC Rule 537.11(b)(5)'; 'is engaged in the unauthorized practice of law' · Checked October 31, 2026

8. According to the CFPB, if your contract is contingent on a satisfactory inspection, you have the right to cancel without penalty if you are not satisfied with the results; with serious flaws, such as a cracked foundation, you may decide not to buy; you can negotiate for the seller to fix things or give you a credit, though the seller may say no; and an inspection is different from an appraisal, but you generally need both.

   Sources 7 · Schedule a home inspection: 'If your purchase contract is contingent on a satisfactory inspection, you have the right to cancel the sale without penalty if you are not satisfied with the results'; 'such as a cracked foundation, you may decide that you don’t want to buy this home after all'; 'negotiate with the seller to have these fixed before you move in, or to give you a credit'; 'the seller may or may not agree'; 'A home inspection is different than an appraisal, but you generally need both' · Checked October 31, 2026

9. According to the CFPB, earnest money is returned to the buyer if the contract is terminated for a permissible reason, and if the buyer does not perform in good faith, it may be forfeited and paid to the seller.

   Sources 8 · Mortgage key terms, 'Earnest money': 'If the contract is terminated for a permissible reason, the earnest money is returned to the buyer. If the buyer does not perform in good faith, the earnest money may be forfeited and paid out to the seller' · Checked October 31, 2026

10. According to HUD Handbook 4000.1, on an FHA loan, if you did not receive the statement of appraised value (form HUD-92800.5B) before signing the contract, the contract must be amended before closing with a clause saying you are not obligated to complete the purchase or lose your deposit if the appraised value does not reach the contract price, and that you may proceed if you choose.

    Sources 2 · Handbook 4000.1, II.A.1, '(i) Amendatory Clause', p. 136–137: 'If the Borrower does not receive form HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised Value, before signing the sales contract, the sales contract must be amended before closing to include an amendatory clause'; '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'; 'The purchaser shall have the privilege and option of proceeding' · Checked October 31, 2026

11. According to VA, if the papers are signed before the Notice of Value is received, the VA Escape Clause lets you back out without penalty, without losing your deposit, if the price is higher than VA's reasonable value; you may also proceed, but the loan is capped at the lesser of the price or that value.

    Sources 9 · VA Escape Clause: 'If the loan papers are signed before the Notice of Value is received, the VA Escape Clause allows the buyer to back out of the purchase without penalty if the property's negotiated price is higher than the "reasonable value" determined by VA'; 'the buyer will not lose their earnest money deposit'; 'the loan amount would be capped at the lesser of the agreed-upon purchase price or the reasonable value' · Checked October 31, 2026

12. According to the CFPB, the counseling agencies in its search tool are approved by HUD and offer independent advice, often at little or no cost, on buying a home, renting, defaults, forbearances, foreclosures and credit; you search by ZIP code; and not every agency offers every service.

    Sources 10 · Find a Housing Counselor: 'approved by the U.S. Department of Housing and Urban Development (HUD)'; 'offer independent advice, often at little or no cost to you'; 'buying a home, renting, defaults, forbearances, foreclosures, and credit issues'; 'Search by ZIP code'; 'Not every housing counselor offers all services' · Checked October 31, 2026