When buying a home, you’re bound to it once you’ve made an offer and the seller accepts.
But what if the home appraises for less than you anticipated? That’s why an appraisal contingency is your ally. You can walk away from the deal with your earnest money deposit if the home doesn’t appraise for the amount you’ve agreed to pay.
Learn more about 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 agreement is legally binding. An appraisal contingency is a clause that allows home buyers to back out of an agreement if the appraisal value of the property is lower than the purchase price.
When Do You Need An Appraisal Contingency Clause?
Most lenders require an appraisal. So if a lender is involved, you’ll likely need a home appraisal and should consider including an appraisal contingency clause in your purchase offer.
If a buyer doesn’t include an appraisal contingency and the home isn’t worth the price they’ve agreed to pay, the lender will likely only lend up to the appraised value or deny the loan application. If the buyer can’t get the loan, they may need to back out of the agreement, risking the loss of their earnest money deposit – which could be thousands of dollars.
“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.”
An Appraisal Contingency Example
Let’s say you and a seller agree to you buying a house for a $300,000 sale price. You decide to make a 10% down payment, which is $30,000, and your lender preapproves you for a $270,000 mortgage to cover the difference.
When the appraisal comes back, you learn the home is valued at $260,000. In this case, the lender may deny the loan because they can’t finance for more than the property’s appraised value. If you have an appraisal contingency, you can withdraw your offer without losing your earnest money.
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Steps To Take When An Appraisal Comes In Low
If an appraisal comes in lower than the original offer amount, buyers can try several solutions before invoking the appraisal contingency.
Ask For A Second Opinion
If the appraisal comes in too low, the buyer can ask their lender for a second appraisal. Take this route only after you’ve made your lender aware of the reasons you think the home is worth more. Maybe the appraiser missed recent comps or missed something high value that’s not easy to see, like radiant floor heating.
Using the figures from the last example, if the second appraiser appraises the home for $290,000 instead of $260,000, the lender may approve your loan based on the new appraisal.
Negotiate With The Seller
You have solid grounds to renegotiate with the seller if the appraisal comes back lower than the home’s sales price. A seller’s willingness to renegotiate may depend on the market.
The seller can reduce the price to match the lower property value, offer to cover more closing costs or provide other seller concessions to make up the difference.
Using the example where the appraisal comes in at $260,000, you may ask the seller to accept a lower offer of $290,000 instead of $300,000. Combined with your $30,000 down payment, the mortgage would only be $260,000 and the lender could then approve it.
Pay More Money
If the seller can’t or won’t renegotiate and you still want the house, you may need to make a larger down payment. Your lender may be more willing to approve the loan if you pay more upfront. It shows you’re a serious buyer and can increase your lender’s confidence in your ability to repay the loan. A larger down payment also lowers the amount you need to borrow from a lender, increasing your chances of loan approval.
Based on the example, you may need to pay a minimum of $40,000 instead of $30,000.
Walk Away From The Deal
If you have an appraisal contingency, you can walk away from the contract. If you don’t have an appraisal contingency in your purchase offer, you risk losing your earnest money deposit and legal action by the seller.
What Other Types Of Contingencies Should You Use?
An appraisal contingency is a common contingency in a purchase agreement, but you can add other contingencies, including:
Finance Contingency
A finance contingency, also referred to as a mortgage contingency, specifies that a purchase depends on loan approval. This approval isn’t based on the sale price of the home; it’s based on a borrower’s ability to qualify for a loan. For example, you may need to use the contingency if you lose your job during negotiations and the lender denies the loan application.
Inspection Contingency
While a property inspection isn’t required, it’s usually a good idea. An inspection contingency makes a purchase conditional on a property passing a home inspection.
Title Contingency
A title contingency makes the home sale contingent on the results of the title search. A title contingency can help you avoid potential legal headaches if a title search uncovers liens or competing ownership claims on the house.
Home Sale Contingency
A home sale contingency is commonly used when a buyer needs to sell their house before they can buy a new one. The contingency can protect the buyer if they can’t sell their house and use the proceeds to purchase the new house.
What If I Want To Waive My Appraisal Contingency?
When you waive the appraisal contingency, you’re agreeing to pay the full purchase price amount – even if the appraisal comes in low.
You might consider waiving an appraisal if the value of the home won’t affect your ability to purchase a home. If you have enough cash to buy a home outright, you might not need to worry.
Waiving an appraisal contingency may also be a tactic that helps you stand out in a competitive seller’s market. Waiving the contingency would eliminate a seller’s fear of a deal falling through over an appraisal that’s lower than the negotiated price.
You should also know that this tactic is a big risk. If the home appraisal is lower than the purchase price, the agreement remains valid, and you’ll be expected to complete the purchase. Otherwise, you’ll lose your earnest money deposit or pay for damages if you walk away from the deal.
What Is An Appraisal Contingency Addendum?
An addendum is a separate form that, once signed by the buyer and seller, becomes part of the real estate purchase agreement. Appraisal contingency addendums are state-specific and allow buyers to move forward with their purchase under certain conditions.
How Does Appraisal Contingency Removal Work?
After weighing the risks of removing the appraisal contingency from your purchase offer, contact your real estate agent and ask them for 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.
FAQ
While you should always discuss contingencies with your real estate agent or an attorney, we have answers to some commonly asked questions.
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The Bottom Line
While all contingencies protect home buyers, the appraisal contingency is one of the most important safeguards available.
With the contingency in place, the buyer will purchase the home only if the appraisal is equal to or higher than the sales price. The appraisal contingency gives you the option to negotiate a lower price or walk away from the deal.
Sidney Richardson
Sidney Richardson is a writer who specializes in real estate, homeownership and personal finance content. She holds a bachelor's degree in journalism with a minor in advertising from Oakland University.
