Learning about appraisal contingencies
Let’s break down the benefits of an appraisal contingency so you have the tools to shop wisely.
What is an appraisal contingency?
This one little clause in your purchase agreement is what can help protect you from overpaying for a property. The appraisal contingency ensures your future home’s actual market value is as high (or higher) than what you agreed to pay for it. If the appraisal falls short, you can back out or renegotiate the deal.
The appraisal contingency ensures your future home’s actual market value is as high (or higher) than what you agreed to pay for it.
We hope you never have to back out of an offer, especially if you’ve fallen hard for a property. But if you agreed to pay $300,000 for a house and the appraiser says it’s only worth $250,000, you can walk away with your deposit intact and continue shopping for your dream home.
Why are appraisal contingencies important?
Whether it’s buying a cappuccino or a lake house, nobody likes to overpay. But beyond safeguarding your wallet, appraisal contingencies give you a moment to step off the emotional rollercoaster of buying a house and put your business hat on. You get an objective professional’s opinion about whether you’re making a sound investment.
More importantly, a low appraisal will limit how much money your bank will lend you. As closing day approaches, your lender will base your official loan amount on the appraised amount, not the sale price.
Pro Tip
An appraisal contingency can give you some bargaining power. If the appraisal comes in low, but you're still keen on the property, you can confidently ask the seller to drop the price.
The appraisal process
After your offer has been accepted, your lender will order the appraisal. Your appraiser will be certified or licensed in your state, and they’re required by law to be impartial with no vested interests in your sale. Objectivity is key!
The appraiser will go to the house in-person and take a good look at it. They check out everything: its location, condition, size, bedroom and bathroom count, the pool you can’t wait to dive into—you name it. They’ll take note of what adds value to the house (like that pool) and what hurts its value, like a driveway that needs repairs.
After this thorough inspection, the appraiser takes the data, looks at comparable sales in your area (aka “comps”), does an analysis and then finally draws a conclusion about the home’s value. Don’t worry—they document everything in an official appraisal report (which you can get a free copy of).
If all goes well, the appraisal gets added to the heap of closing paperwork and you can celebrate clearing another hurdle on your way to homeownership.
Deciding when to waive an appraisal contingency
Considering all the pluses we’ve covered, is it ever smart to waive this benefit? Well, it depends.
Waiving appraisal contingencies
In a hot market where bidding wars break out, waiving the appraisal contingency might help you snag that oh-so-perfect property. This move could make sense if you've done your homework on the property's value, have extra cash to cover the difference between the sale price and appraised price, or are buying in a rapidly appreciating area. It's a bold strategy, but it can make your offer rise to the top.
Keeping appraisal contingencies
If you have any doubt about the property’s value or if you’re relying on a larger loan amount, it’s wise to hang onto that appraisal contingency. Remember, this clause is your safeguard, and it also has a direct impact on affordability and loan amount.
Steps to take if an appraisal is too low
If your appraisal is too low, don't panic—you've got options. You can start by talking to the seller about dropping the price to match the appraisal. It's a straightforward approach that may just work.
If that doesn't fly, consider getting a second opinion from another appraiser. Sometimes a fresh set of eyes can spot value that the first appraiser missed. And if all else fails, you can always lean on your appraisal contingency to back out of the deal without losing your deposit. It's your get-out-of-jail-free card.
There is one last option—which often isn’t an option: you could pay the difference between the appraised price and the sale price. Because your lender will base your loan amount on the appraised price, you’ll have to shell out your down payment plus this difference up front at closing. If you’re thinking about going this route, make sure you understand your DTI and have the means to do it comfortably.
