What’s an appraisal contingency?
Contingencies are common when buying a home. They just mean that certain conditions must be met by either the buyer or the seller before the sale can close. Contingencies offer protection to you as a homebuyer because they allow you to back out of a home sale if something that’s specified ahead of time in the contract goes wrong. Inspection, financing, appraisal, title and home sale are five of the most common contingencies.
An appraisal contingency requires that a home appraisal be conducted. If the home’s current value comes in lower than the agreed sale price, you may have the option to walk away from the deal or potentially renegotiate the sales price with the seller of the home. If you decide to cancel your purchase, an appraisal contingency also can give you the right to reclaim your earnest money deposit.
How does an appraisal contingency work?
First, let’s go over exactly what home appraisals are and their benefits.
Shortly after your purchase agreement is signed, Guild will order a home appraisal. An appraisal is a process of evaluating a property’s fair market value, conducted by a licensed, professional real estate appraiser. The appraisal report includes details on a home’s general condition and a review of the surrounding area. The report determines if a home’s sale price, and the borrower’s requested loan amount, are appropriate.
Appraisal contingencies are added to the purchase agreement. If the appraisal comes in lower than the agreed-upon purchase price, an appraisal contingency may allow you to cancel the contract during a set period of time without any repercussions.
How long is appraisal contingency?
Real estate transactions are time-sensitive, with timelines set for contingencies to keep the deal moving forward. Your real estate agent and loan officer can offer guidance on the length of an appraisal contingency based on appraisal turn-times in your area.
Example of an appraisal contingency
You and the seller have agreed on a purchase price of $400,000, but the appraisal comes in at $380,000. With an appraisal contingency, you can break the sales contract without forfeiting your earnest money deposit.
Is an appraisal contingency required?
While appraisals are required part of the mortgage process, appraisal contingencies are not. Ask yourself, “Am I comfortable risking losing my earnest money deposit?” If the answer is yes, and you’re looking to sweeten the deal with a seller, you may decide to waive the appraisal contingency. We recommend discussing the pros and cons with your real estate agent and loan officer before you make a decision.
How an appraisal contingency protects you
If the home’s appraisal price comes in lower than the offer price, it’s possible that your loan won’t be approved. With an appraisal contingency for protection, you could negotiate a lower purchase price with the seller.
Options if the appraisal comes in low
Unfortunately, there are times when a home doesn’t appraise at the sales price. This can happen for various reasons, such as overpricing by the seller or a shortage of comparable sales in the area. There are several options you can take to continue with the purchase.
- Negotiate a lower purchase price
If your appraisal comes in low, one of the best options is to ask your real estate agent to step in and negotiate a reduced purchase price with the seller.
- Request the seller fix issues
If the appraisal identified issues that would raise the price once fixed, you could request that the seller address the repairs.
How to write an appraisal contingency
Writing an appraisal contingency is best left to the experts. Buying a home is often the most significant financial purchase of your lifetime. Having a professional real estate agent by your side negotiating the terms of the sale can help set you up for success.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.