What is the Appraisal Contingency for FHA Loan Buyers?

Rider E of the Florida REALTORS / Florida BAR contract for VA buyers reads:

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 in accordance with HUD/FHA or VA requirements a written statement by the Federal Housing Commissioner, Veterans Administration, or a Direct Endorsement lender setting forth the appraised value of the Property of not less than $ (Purchase Price)… The appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure.

In this case, when an appraisal comes in below the purchase price, FHA will insure the loan only up to 97.5%. (minimum FHA down payment is 3.5%) of the appraised value. Either the seller would have to lower the purchase price to appraised value, the buyer would have to bring the extra cash to cover the shortfall, or a combination thereof. In the event there is no agreement, the buyer may cancel the contract.