After you’ve signed a purchase agreement on a home, you’ll need to have a licensed appraiser come to the property and appraise the house. A home appraisal is an estimate of the property’s value, which takes into consideration factors like location and condition of the house, as well as the recent sales of similar homes in the area. This is an extremely important part of the home buying process, because the value determined by the appraiser is the maximum amount that can be loaned out by a mortgage company.
For example, if you’re seeking a $200,000 mortgage, but the appraisal comes back and says the house is only worth $190,000, the mortgage lender is only able to finance $190,000. This leaves you to pay the remaining $10,000 out of pocket, as well as the down payment and other closing costs.
If the appraisal comes in too low, you may not have the necessary funds in your bank to purchase the house. However, at this point, you’ve already signed a purchase agreement, which is a legally binding contract that states that you will buy the home from the seller. If you break this agreement, you will lose your earnest money deposit, which could be anything from a couple of thousand dollars to 10 percent of the purchase price. So what can you do?
Traditionally, purchase agreements include something called an appraisal contingency in the purchase agreement, which acts as an exit for the buyer in the case of a low appraisal. This way, if the appraised value is less than the agreed-upon price, you can get out of the contract without taking a hit to your pocketbook. An appraisal contingency is a good way to keep you out of a bad situation.
When Should I Waive the Appraisal Contingency?
Although rare, you may come across a situation where you should consider waiving the appraisal contingency. This is where you agree to pay the full amount of the contracted price, even if the appraisal comes in low. Waiving the appraisal contingency in the purchase agreement strengthens your offer because it tells the seller that you will – no matter the appraised value – purchase the house. You should only consider going this route if there is a lot of competition for the house you are trying to purchase. Even then, this is still a somewhat risky move. After all, in the event that the appraisal comes back drastically low, you will be expected to pay the difference. In most cases, it’s best to keep the appraisal contingency in place.
Do you have more questions about loan contingencies? Let us know in the comments below. And if you’d like to learn more about purchasing a home, start the process today!
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