Understanding an Appraisal Contingency

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 When buying a home, you can include contingencies in the purchase contract to protect yourself throughout the process. A contingency is a condition that must be met for the contract to stay valid. If the condition isn’t met, the buyer can walk away from the sale without losing their deposit. There are three main types of contingencies, though you can include others as long as the seller agrees.

Most lenders require a home appraisal by a third-party to ensure they aren’t lending more than the home is worth. If the home appraises for less than the agreed price and you have an appraisal contingency, you can:

• Negotiate a lower price with the seller
• Walk away and get your deposit back if an agreement isn’t reached

This protects you from overpaying for a home. In competitive markets, though, some buyers may waive this contingency to make their offer more attractive.

If you’re using a mortgage to buy a home, this contingency protects you if your loan is not approved. Even with a pre-approval letter, nothing is guaranteed until the loan goes through underwriting. If your financing falls through, you can back out of the deal and get your deposit back. This is crucial if your financial situation changes unexpectedly during the buying process.

A professional home inspection can reveal hidden issues with the property. With this contingency, you can:

• Negotiate with the seller to fix any major problems
• Ask for a lower sale price
• Walk away and get your deposit back if no agreement is reached

This is key for peace of mind, as most buyers aren’t experts in home repairs.

If the home appraises for less than the purchase price, lenders will only loan up to the appraised value. For example, if you agreed on $500,000 but the home appraises for $480,000, you have options:

• Pay the difference with a larger down payment
• Ask the seller to lower the price
• Use the appraisal contingency to get your deposit back and find another home

In a seller’s market, waiving the appraisal contingency could make your offer more appealing, but it’s a risk. Sellers appreciate buyers willing to move forward regardless of the appraisal, but be cautious as this may mean paying more than the home’s worth.

Including the right contingencies can protect you financially and give you flexibility during the homebuying process. However, in competitive markets, waiving some contingencies might strengthen your offer—but always weigh the risks!