Craftsman style house

Buying a home can be an expensive and risky proposition. You may not be familiar with the market in the area, or home values there can be hit or miss.

Once you’ve made an offer and it’s accepted by the seller, you’re both bound to the contract. As the buyer, if you back out for a reason not allowed by the contract, you’ll lose your earnest money deposit, which could be thousands of dollars.

That’s why an appraisal contingency is your ally: It will let you walk away from the deal with your deposit if the home doesn’t appraise for the amount you’ve agreed to pay.

What’s a Contingency?

Contingencies are conditions that must be met before a real estate contract is legally binding, and each includes a specified time frame.

Most purchase agreements include three contingencies:

  • An appraisal contingency stating the home must meet the price you’ve agreed to pay (or higher) when appraised.
  • A finance contingency stating that the deal depends on the approval of your loan.
  • An inspection contingency requiring that the home pass a home inspection.

When Do You Need an Appraisal Contingency?

If a lender is involved, you’ll need an appraisal and should consider an appraisal contingency. “It’s an opt-out for the buyer who’s financing,” explains Susanna Haynie, a real estate broker in Colorado Springs. “If the home is not worth the price the buyer has agreed to pay, it can impact how much the lender is willing to lend and possibly the ability of the buyer to secure the loan.”

Cash buyers have an option to add an appraisal contingency to their offer and engage an appraiser, “But it’s not a third-party requirement,” says Haynie.

“Cash offers are king because they do NOT require an appraisal and can close quickly,” she adds.

Who Pays for the Appraisal?

Buyers normally pay for the appraisal and should consider them 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.

The lender will retain a state-licensed registered appraiser to determine the fair market value of the home. The appraiser arrives at that value based on the home’s general condition, location and comparative sales (or comps) in the area.

How Long Does an Appraisal Contingency Take?

 Your lender or real estate agent can provide guidance on the timing for the appraisal contingency, but generally you should allow 2 – 4 weeks for the appraiser to visit the home and complete their report. “Different loans take different qualifications,” says Haynie. “And some seasons will be busier than others for the inspectors.”

If the value comes in higher than the sales price, everyone is happy, except maybe the seller, who might feel he should have asked for more. But if the appraisal comes in lower, things can get complicated.

What Happens if the Appraisal Comes in Low?

The deadline date for an appraisal contingency is the date by which any claims made by the buyer must be made. So, if the appraisal comes in too low, and there’s time, the buyer can petition for a second appraisal.

If you go this route, be sure to make the lender aware of reasons you think the home is worth more, such as recent comps the appraiser may have missed, or something of value that’s not really visible like radiant floor heating.

If the value is still too low, there are three options:

  1. The buyer can agree to bring more money to the table.
  2. The seller can reduce the price to meet the lower property value.
  3. The parties may agree to split the difference in any combination.

The contract may be terminated by either party if they can’t agree.

What Is an Appraisal Contingency Waiver?

This is where you agree to pay the full amount of the contracted price, even if the appraisal comes in low.

Waiving the home appraisal contingency clause is rare but there are exceptions. You might waive an appraisal if the determined higher or lower value does not have an influence on your ability to purchase the home and obtain the loan, which is usually the case of a large down payment. “This may be a great strategy and very beneficial in a multiple offer situation,” Haynie says.

But understand that you’re taking a risk. If the home appraisal is lower than the agreed purchase price, the contract is still valid, and you’ll be expected to complete the sale (or lose your earnest money or pay for other damages).

For example, if you’re seeking a $300,000 mortgage, but the appraisal comes in at $290,000, the mortgage lender is only able to finance $290,000. This leaves you to pay the remaining $10,000 out of pocket, as well as the down payment and other closing costs.

“In most cases, it’s best to keep the appraisal contingency in place,” Haynie says.

What Is an Appraisal Contingency Addendum?

An addendum is a separate form that, once signed by the buyer and seller, becomes part of the sales contract. Appraisal contingency addendums are state specific and allows a buyer to move forward with the purchase under certain conditions they agree to.

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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This Post Has 12 Comments

  1. Appraisal came in $25k less than purchase price. We signed an addendum that stipulated we would pay appraisal + $8k over appraisal. We signed it and also noted on the addendum was our new purchase price (the result of a bidding war). My agent and the seller’s agent work at the same office. I have asked my agent repeatedly for a copy of the SIGNED addendum (we signed, but I don’t have a copy with seller’s signature).

    Question – is the seller bound by the addendum? If the seller took the new increased price from the addendum but is also unwilling to honor the second-half of the addendum (appraisal + $8k), isn’t that an issue? The seller thinks the appraisal was not correct; I think he’s been led astray by his realtor. Virtually no comps in the area support his price.

    Bottom line – we are feeling a little bamboozled by this real estate office (the number one office in our metropolitan area btw). If the seller did not sign that addendum what recourse do we have? We are in escrow, have rented our condo out and have been preparing to move.

    1. Hi Sarah:

      I see that you’re working with us. I’m going to get this over to our client relations team so that someone can reach out and make sure you get the correct information for your situation. Thanks for reaching out!

      Kevin Graham

  2. In the example in your article, you show the mortgage as the same as the house price and that if it’s appraised lower you would have to pay the difference. What happens in the case where you’re putting 30% down and the mortgage is only 70% of the home price and the appraisal comes in low? Why would you pay the difference if the mortgage isn’t the full amount and the bank isn’t at risk? Help!

    1. Hi John:

      If it’s a primary property, you would never have to put 30% down. Since that’s the case, in the scenario you described, you could take some of the amount you’re putting toward the down payment and it would be used to make up the difference between the appraised price and the sale price. Your down payment would be slightly less, but as long as it’s still over 20%, you don’t have to pay for mortgage insurance.

      Thanks,
      Kevin

  3. We are the Sellers and the Buyers signed an addendum stating they would purchase the house at the offer price regardless of the appraised value. The appraised value came back $3,000 higher than our original asking price but $5000 lower then what they offered. The square footage on the appraisal was also 207 square feet less than what the county records indicated. The Buyers now want us to renegotiate the purchase price even though they signed the Addendum to win the bidding war. Are we, the Sellers, being unreasonable by refusing to renegotiate? We took there offer (which was lower than our other offer) based on this Addendum.

    1. The contract is between you and the buyers. If they don’t want to honor the contract, you have the right to put the home back on the market. You took their offer on that understanding.

  4. Question
    We are in the middle of buying a house. It has been 35 days with still no apprisel. What can we do to keep the house we are trying to buy? The sellers have given us a one extra week to have the appraisal done. We are going to need 3 weeks because of quickens inability to have an appraisal done in a timely manner. Any suggestions on what to tell the seller???

    1. Hi Katie:

      I’m sorry you’ve had this experience with us. Thank you for giving us the opportunity to look into it and turn this around for you. Someone will be in contact.

      Thanks,
      Kevin Graham

    1. Hi Thomas:

      You do have the option of asking for an appraisal appeal. It helps to have specific reasons you think the appraisal came in low. This might be something like using the wrong properties for comparison, etc. There’s more information on this in this blog post. It also highlights other options you might have. Hope this helps!

      Thanks,
      Kevin Graham

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