cartoon of home inspection

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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This Post Has 8 Comments

  1. 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

  2. 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.

  3. 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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