Appraisal Contingency
What is an appraisal contingency?
Appraisal contingencies are designed to protect Buyers from paying too much for a property or lenders from loaning too much on a property.
How does it work?
With a standard appraisal contingency, the property must appraise for the purchase price in the contract. If it doesn’t, the parties have to figure out who will make up the difference. Either the Seller needs to lower the price or the Buyer needs to bring more cash to the table. If the Parties can’t agree, you can cancel the deal and get your earnest money deposit back.
Why can’t I just increase the loan amount?
Lenders will not provide a loan on an amount over the appraised value of the property even if you are approved for a higher loan amount. Remember, lenders want to get their money back if you default on the loan. If they have lent you more than the property is reasonably worth, they cannot recoup that money if you default.
Do I have to Have One?
If you are getting a loan, then you typically need an appraisal. However, you can waive the appraisal contingency (the appraisal is separate from the appraisal contingency). Doing so means you can’t cancel the deal if the property appraises for less than the purchase price. That will require you, the buyer, to bring extra cash to the table to make up the difference.
Can I have an example?
Let’s assume you offer to purchase a property for $500,000 with a standard 17 day appraisal contingency. The property appraises for $480,000. There is now a gap of $20,000 that your lender will not cover. That means you need to provide that cash to cover the gap. That either requires MORE funds up front or the same funds but with less going to your down payment on the loan. The more you are bringing to the table as a buyer, the more wiggle room you have in this scenario.
Why would the Seller agree to lower the price?
In a neutral market or a Buyer’s market, the seller will be more inclined to lower the price because they know that the appraisal will present the same problems with a future buyer (unless it’s an all cash buyer) and they don’t want to risk a longer time on market.
