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!
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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.)
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