When buying a home, certain contingencies may be included to protect the buyer and seller.
These contingencies need to be met for the contract to be binding.
We will explain what an appraisal contingency is and why it’s so important.
What is a Contingency Clause?
When a homebuyer submits an offer to a seller, the buyer can include certain conditions that must be met for the purchase to be finalized. These are called contingencies, and they are in place to protect the parties. A contingency is a condition that must be met for the contract to be binding. If the contingency is not met, then the contract is considered null and void.
What is an Appraisal Contingency Clause?
During the mortgage process, a home appraisal is performed on the property being purchased. The reason for a home appraisal is to check the current market value of the home. Lenders will not loan more money on a property than the property is worth. This protects not only the lender but the buyer as well.
This is a significant clause in the contract because lenders won’t lend more money on a property than it’s worth. If the home appraises for less than the selling price, there will be a negative equity state. The reason lenders do not allow this because if a borrower defaults on the loan, they will not be able to recoup their money because the house is worth less than what the loan is for.
Appraisal Contingency Example
If a buyer and seller agree on a purchase price of $300,000, there will be an appraisal contingency included in the contract. If the home appraisal comes back for $285,000, the buyer can cancel the contract without penalty. In this scenario, the seller would either reduce the selling price to $285,000 or cancel the contract. In some cases, a buyer could still purchase the property for $300,000, but they would need to pay the additional $15,000 out of their own pocket.
If you’re a seller, read our article about how to avoid a low home appraisal to ensure you get a fair appraisal amount.
When Should You Waive the Home Appraisal Contingency?
Other Types of Home Sale Contingencies Found in Real Estate Contracts
A financing contingency, also known as a loan contingency. Is a clause included in real estate contracts that protect the home buyer if they are unable to obtain financing? This loan contingency protects buyers from being held to the contract if they are unable to find financing.
This clause is fairly common in real estate contracts, but it will weaken your offer. If a seller receives multiple offers, they will have more confidence and be more inclined to favor offers without a loan contingency. Waiving this condition may strengthen your offer, but it does come with risks. Only if you are very confident in your ability to obtain financing should you waive this contingency.
An inspection contingency allows the buyer to cancel this contract based on the findings in the home inspection. If certain items need repair or replacement, the buyer can demand the seller make these repairs before closing.
An inspection contingency is a scary one to sellers because it gives buyers much more negotiating power. Buyers can also walk away from the deal if the home inspection comes back with unfavorable results. While this contingency is great for buyers, many sellers look to avoid them.
Home appraisal contingencies help protect the home buyer from being held to a real estate contract if the home appraisal comes in lower than the purchase price. While this contingency is great for buyers, it is something that could potential weaken your offer.
However, waiving the appraisal contingency is risky, and you will be expected to finalize the home purchase regardless of the appraisal. It’s always best to seek the advice of a trusted loan officer and real estate agent. They will help guide you through the home buying process.