Can someone explain to me an appraisal contingency and how and when to use it?
A realtor friend of mine explained it to me, but it went completely over my head as I’m in the planning stages of buying a home. Thank you!
In: 1
Don’t quote me on this but the way it was explained to me was the sale of the home was dependent on whether it appraised equal or more than the loan amount being landed. For example if a house was up up for 100k, the amount being landed at 20% down would be 80k. If the house appraises for that amount or more the contingency is lifted.
An appraisal contingency makes your offer contingent on an appraisal. What this means is let’s say you make an offer to buy a house for $350k with an appraisal contingency attached and it gets accepted. What this means is that if the appraisal comes in below $350k, then your offer basically gets automatically reduced to the appraisal amount. So let’s say it comes in ar $325k which is less than $350k, then your offer would reduce down to $325k and you’d only pay $325k for the home if the seller wishes to proceed with the transaction. If the appraisal comes in at $360k, then your offer of $350k still stands. So, it’s meant to protect the buyer from paying more than the property is actually worth.
So… The sale price of the house is $1 million. You offer to pay $1 million. You need to get a mortgage. Before the bank will give you the mortgage, they go see how much they think the house is worth. This is because if you stop making payments they will take the house and sell it to get their money back. So they want to make sure they don’t lend you more than it is worth.
Appraisal contingency says if you offered $1 million and the bank thinks it is only worth $500k, you can get out of the contract to buy.
When you want to buy a house, you need a mortgage, a loan where the bank lends you money with the house itself as collateral. To decide how much they are willing to lend you, they will *appraise* the house. They will determine how much it is worth. They will lend you no more than it is worth, because they need to be able to sell the house to pay off the loan if you default.
MOST offers to buy a house have an appraisal contingency, meaning they offer “I am would like to pay you $XXXXXX dollars for this house, as long as the bank agrees after they appraise it.”
Some people, to make their offer look better in a competitive market, may say “I am would like to pay you $XXXXXX dollars for this house and, I have 20k set aside that I can use to cover an appraisal gap of up to that much.” Meaning that if the house appraises at $XXXXXXX-20k or more, you’re still on the hook to buy even though the bank can’t loan you the full amount, because you have the difference. That’s risky though because that means you’re buying the house for more than it’s technically worth.
Others are buying cash in hand (lucky dogs,) so they don’t do the appraisal contingency at all.
If the bank says the house is worth too little to get the mortgage you need, all parties walk away from the deal, no harm no foul, to start again. (Though both parties are out the cost of inspections, lawyers, already done before appraisal etc.)
It’s a part of an agreement to buy a house that lets you cancel the purchase if the appraisal doesn’t match the agreed upon price. When you buy a house, the lender will send an appraiser to make the sure the house (their collateral) is worth what you are paying for it. If it doesn’t match, you have to either come up with a larger down payment so bank is still only funding the original percentage, get the seller to drop the price to the appraisal, or cancel the purchase.
Latest Answers