What is an Appraisal Contingency?

When you put in a purchase offer on a home, your real estate agent will most likely walk you through several contingencies, including with an appraisal contingency.

A contingency is a clause in a contract that allows either the buyer or the seller to back out of the contract in certain situations. An appraisal contingency protects the buyer. After you have signed the contract and agreed to purchase the home, either you or your lender will order a home appraisal. If the agreed-upon price of the home is more than the appraisal, the buyer will have the option to withdraw from the contract or renegotiate the sale price.

How appraisal contingencies work

Homebuyers will include a home appraisal contingency to protect themselves if the appraisal comes in below the purchase price. That way, if the home is not appraised for the amount the buyer had agreed to pay, they can back out of the purchase contract or renegotiate the price without losing their earnest money deposit, which is the deposit paid to the seller.

If you’re taking out a mortgage to pay for the home, the lender will order an appraisal. That way, the lender knows that if you foreclose on the home, it can still recoup all or most of the amount loaned to you. In other words, the appraisal helps underwriters assess the risk of lending you money to buy a home, and determine how much they’re willing to loan you. You’ll be able to borrow against the appraised value of the home, not the sale price.

Either you or the lender will order an appraisal. If you’re paying in cash, you’ll order the appraisal. When that happens, a licensed professional appraiser will look at the property and compare it to similar homes that have recently sold in the area. For instance, if the home is 2,000 square feet and has three bedrooms and two bathrooms, the appraiser will look for homes that are the same size.

The appraiser will use the data gathered and then compile a report, including the appraised value of the home. This copy will be sent to the buyer and lender. If the appraisal is less than the buyer anticipated and they have an appraisal contingency, the buyer can then choose to negotiate with the seller or back out of the offer.

What to do If the appraisal is less than the offer?

You have a few options if the home you want to buy appraises for less than the purchase offer. You can get another professional opinion, renegotiate the purchase price, cover the gap with a larger down payment, or withdraw from the contract.

Getting another appraisal

If you’re not sure whether the report is accurate, you can get another appraisal to either confirm the market value or to adjust it. Keep in mind the buyer will need to pay for another appraisal, which will typically cost several hundred dollars.

Making a larger down payment

If you can afford to, you can choose to make a larger down payment to cover the difference between the purchase price and the appraised value of the home. That way, the lender could still approve your loan, and you can move forward with the home purchase.

However, putting down a larger down payment than originally planned isn’t usually an option for most buyers.

Renegotiating the purchase price

Renegotiating is one of the most common choices when an appraisal comes in too low. Buyers can use the report to ask for a lower sale price, especially if the appraisal reports show that comparable properties have sold for less.

The appraisal might also come in low because of the condition of the home. In that case, you can negotiate with the seller and ask them to make the necessary renovations or repairs to bring the home value up. You’ll need to get another appraisal after the repairs or renovations are made.

Backing out of the purchase

You can back out of the purchase immediately if the appraisal comes in too low. However, if you’re still interested in the property, you’ll probably want to try to negotiate with the seller or get a second appraisal before backing out.

When should you waive an appraisal contingency?

If you’re buying in a hot market, you might consider waiving the appraisal contingency to make your offer more interesting to the seller. Keep in mind that the appraisal contingency protects you and your deposit. In some cases, it may be less risky to waive the appraisal contingency.

Waiving the appraisal contingency is likely to be less of an issue if:

• You’re paying cash for the home.
• You want to strengthen your purchase offer in a seller’s market and have ways to work around the risk.
• You’re purchasing the home through seller financing.
• You’re putting down a large down payment (more than 20%) on the home.

How long is an appraisal good for?

According to Fannie Mae, an appraisal for most conventional loans is good for 12 months before the home closes, though a report more than four months out will need to get an appraisal update. However, how long an appraisal is good for will depend on the type of loan you have and lender requirements. For example, appraisals for USDA loans are valid for up to 150 days, whereas appraisals for VA loans are typically valid for up to six months.

In general, recent appraisals are more accurate. If you’re not sure when your appraisal will expire, contact your lender.

Other types of real estate contingencies

There are other contingencies that are commonly added in a purchase offer. These include:

• Mortgage or financing contingency: A buyer can back out of a purchase contract if they’re unable to get a mortgage or financing to buy the home.
• Title contingency: If a title company checks the home’s title and it comes back with liens or shows that someone other than the seller may have a claim to the property, the buyer can back out of the deal.
• Home inspection contingency: This contingency indicates that the buyer can back out of the deal if there are undisclosed issues with the property. These issues usually require significant repairs.

Frequently asked questions (FAQs)

What is an example of an appraisal contingency?

Let’s say you agreed to buy a home for $500,000, but an appraisal determines that it’s only worth $400,000. If you have an appraisal contingency in your contract, you can renegotiate the price with the seller or back out of the deal.

How long is an appraisal good for?

An appraisal is usually good for several months, though the exact timeframe will vary depending on the type of home loan you have. For example, an appraisal for a Fannie Mae loan is usually good for up to 12 months, whereas a VA loan is good for up to six months.

How much does an appraisal cost?

A home appraisal usually costs several hundred dollars, though the exact amount will depend on your location, the property, and the type of appraisal being completed. For example, an appraisal for a single family home tends to cost less than one for a multi-family home, and a desktop appraisal is cheaper than a full appraisal.

What is an appraisal gap?

An appraisal gap is the price difference between the amount the buyer has agreed to pay for the home and its fair market value as determined by a professional appraiser. In some cases, a large appraisal gap could mean the buyer has to pay more out of pocket to secure a mortgage. If the buyer has an appraisal contingency, they will have the option to negotiate a lower price for the home or back out of the purchase.