BIC TIP #1150: Is DD Returned Due to a Low FHA/VA Appraisal?
The FHA/VA addendum says that if the property does not appraise, the buyer is entitled to a refund of their monies. So does that mean the buyer gets everything back, including due diligence? Stephen Long, the Notorious BIC and MLO, hears this one a lot. The standard practice and understanding in North Carolina is that the refund applies only to earnest money. The due diligence fee stays with the seller.
What the Addendum Is Really Refunding
When an FHA or VA loan is involved and the appraisal comes in below the purchase price, the addendum gives the buyer protection. Stephen explains that in North Carolina, that protection is understood to cover the earnest money deposit.
In that scenario, the earnest money goes back to the buyer. That is the money the addendum is talking about.
Due Diligence Is a Different Animal
The due diligence fee works differently. It is a non-refundable fee that goes directly to the seller, and it will always stay that way unless the seller breaches the contract in some way.
A low appraisal is not a seller breach. The seller did not do anything wrong when the appraiser’s number came in under the price. Because there is no breach, the seller still gets to retain the due diligence fee.
Set Expectations Before the Appraisal
The time to explain this is before the offer goes in, not after the appraisal comes back low. Buyers using FHA or VA financing should understand that the addendum protects their earnest money in a low appraisal situation, but their due diligence fee is at risk the moment it is paid.
That understanding helps buyers decide how much due diligence to offer and helps avoid a painful conversation later. If a dispute does arise, refer the parties to a real estate attorney.
The Practical Takeaway
Under the FHA/VA addendum, a low appraisal can entitle the buyer to a refund, but standard practice in North Carolina is that the refund applies to earnest money only. The due diligence fee is non-refundable and stays with the seller unless the seller breaches. Make sure your buyers understand the difference before they write the check.
