What is an Appraisal Contingency?
An appraisal contingency protects homeowners from overpaying for a property in an unstable market. This clause is included in the purchase agreement, and the buyer has the right to withdraw from the transaction if the house’s appraisal value is lower than the sales price. When preparing to buy a new home, it makes sense to consider an appraisal contingency in your purchase contract.
Read on to learn more about how rating contingencies work, when they should or should not be used, and what to do if the rating is lower than expected.
How does an Appraisal Contingency Works?
The appraisal contingency protects the buyer when purchasing a house. Typically, the seller will request a deposit when accepting your offer to buy the property. You may lose your deposit and pay additional fines if you cancel the transaction without appraisal contingency.
Having an appraisal contingency in your purchase agreement might get you off the hook. However, it notifies the customer of your intent to evaluate a property before completing a transaction. It also gives you the right to withdraw money and get back the deposit without penalty when the property’s value is lower than the amount you provided.
To explain, suppose you hire a licensed home appraiser to assess a property for which you are willing to pay $400,000. After reviewing properties for sale and other comparable properties in the area, the appraiser assigned a value of $325,000. You may have to withdraw from the transaction if the lender doesn’t approve a home loan that exceeds the apartment’s appraisal value. That is unless you’re able to cover the difference with either a deposit or a sales price reduction.
When to Use this Rating Contingency
The appraisal contingency can protect you from the booming real estate market, especially when the house you are interested in reaches your maximum budget. When demand for new houses exceeds supply, bidding wars often occur, further increasing the price of available listings. When you bid for an overpriced home, you have many options. This rating contingency drives sellers to adjust their selling prices or risk, forcing borrowers to withdraw funds from their deposits.
When to Waive an Appraisal Contingency
It is not always required to include an appraisal contingency in your sales contract. Waiving the appraisal contingency can make your listing more acceptable to sellers. However, this should only be performed under certain circumstances.
You can dismiss the appraisal contingency even if you have a low credit rating and a good financial condition. In most cases, the homeowner will pay for the property in cash or pay a down payment to bridge the gap between the price you provide and the house’s estimated value.
What Happens if the Appraisal Is Low?
Low appraisals can bring a lot of pressure when you are preparing to buy a new home. However, you have many options, depending on whether you have an appraisal contingency.
- You must ask a lender for a second estimate if you think the first estimate is wrong.
- You can cancel the contract and refund your deposit if the second grade is low.
- More so, you can negotiate the sale price or pay the difference in cash—when the seller does not budge to save the transaction.
The Bottom Line
The rating contingency is a valuable tool for home buyers. You are protected from financial losses; if you offer to buy a property, and its valuation is lower than the selling price. This clause allows you to negotiate a better deal or terminate the contract without any consequences. Still, it may put you at a disadvantage compared to other buyers who don’t have agreements.
Finally, you can exclude appraisal contingencies from the purchase contract to make your offer more appealing. Discuss any queries or concerns you may have with your real estate lawyer before waiving an appraisal contingency.