How An Appraisal Contingency Can Protect You
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Buying a home can be an expensive and risky proposition. Once you’ve made an offer on a house 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. Read on for our full guide to what an appraisal contingency is and how it can protect you.
What Is An Appraisal Contingency?
Contingencies are conditions that must be met before a real estate contract is legally binding, and each includes a specified time frame. An appraisal contingency is a clause that allows home buyers to back out of their contract if the appraisal value of the property is less than the agreed-upon purchase price.
Most purchase agreements include three contingencies:
- An appraisal contingency
- A finance contingency: This states that the deal depends on the approval of your loan.
- An inspection contingency: This requires that the home pass a home inspection.
When Do You Need An Appraisal Contingency?
If a lender is involved, you’ll need a home 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, Colorado. “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?
The appraisal is an extremely important part of the home buying process, typically paid for by the buyer. The average cost that a buyer will pay for an appraisal is $300 – $500 and will be due either upfront or at closing. Paying for an appraisal is important 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 specific timing for your 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 they 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 for an appraisal contingency falls on the date by which any claims made by the buyer must be made. So, if the appraisal comes in too low, the buyer can petition for a second appraisal.
If you go this route, be sure to make your lender aware of the reasons you think the home is worth more – maybe that’s 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:
- You, as the buyer, can agree to bring more money to the table.
- The seller can reduce the price to meet the lower property value.
- Both parties may agree to split the difference in any combination.
The contract may be terminated by either party if you can’t agree.
FAQ: Appraisal Contingency
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. Waiving an appraisal contingency can be a smart tactic for standing out in a competitive seller’s market. Doing so could eliminate a seller's fear that the deal might fall through if the property isn’t appraised for the initial asking price. “This may be a great strategy and very beneficial in a multiple-offer situation,” Haynie says.
You should understand, however, that you’re taking a risk. If the home appraisal is lower than the agreed upon 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 allow buyers to move forward with their purchase under certain agreed-upon conditions.
How does appraisal contingency removal work?
If you’ve weighed the risks of removing the appraisal contingency from your contract, there’s a few additional steps to finalize its elimination.
First, read through the contract to make sure you’re within the designated appraisal contingency period. The length of this decision-making timeline varies by state, as well as the terms in the real estate contract.
If it still applies, contact your real estate agent to get a contingency removal form. The completed form must be submitted in writing to the seller’s agent and signed by the seller for final confirmation. Don’t forget: Removing the appraisal contingency will make you, as the buyer, liable for the cost of all repairs and completion of the sale.
The Bottom Line
While all contingencies are relevant to the home buying process, the appraisal contingency is one of the most important safeguards available to home buyers.
This piece of the real estate contract states that the buyer will only purchase the home if the appraisal is equal to or above the sales price. The appraisal contingency gives you the option to negotiate a lower sale price or walk away from the deal.
If you’re ready to take the next step and learn more about purchasing a home, start the process today with Rocket Mortgage®.