WHAT IS AN APPRAISAL CONTINGENCY?
DO I NEED AN APPRAISAL CONTINGENCY?
An appraisal contingency can be part of cash purchases or conventional loan. With a VA or FHA loan, the appraisal contingency is automatically built-in to the financing contingency. However, with a conventional loan, it is a separate contingency.
No matter which loan program you choose, the lender will require an appraisal as part of the loan in order to approve it. Lenders want to make sure that the house is actually worth what you’re paying for it. This is a great contingency because it protects buyers from overpaying for a house. However, if you have a conventional loan, you can choose not to include it.
HOW DOES THE APPRAISAL CONTINGENCY WORK?
The lender will order an appraiser to go to the property in person, measure, note the amenities, and put a value on it based on comparable sales in the past six months. If the value is equal to or above the sales price, the property has “appraised” and the contingency can be removed. If the value is lower than the sales price, the lender will not make the loan as it is currently structured. Lenders will only loan up to the appraised value. Thus, the buyer and seller have three options.
- The buyer could decide to bring the difference between the appraised value and the sales price in cash to be added to their down payment.
- Alternatively, the seller could lower the sales price to the appraised value.
- Most frequently, the buyer and seller negotiate this somewhere in the middle so that the sales price is lowered and the buyer brings additional cash to the table. Both parties moving towards the middle make the negotiations more palatable.
If none of those options is acceptable to the parties, the buyer can void the contract. The buyers feel that the valuation was faulty, they can also decide to use a new lender and get a new appraisal.
HOW LONG IS A NORMAL APPRAISAL CONTINGENCY?
Typically, we recommend 21 days for an appraisal contingency for conventional loans – as mentioned above for FHA and VA loans automatically build this contingency into the financing contingency. The timeline can be shorter if your lender is able to do a rush order.
WHY MIGHT A PROPERTY NOT APPRAISE?
If there have not been sales in the defined neighborhood in the past six months or if the sold homes have been smaller or in poor condition, the value might not appraise. In a market where values are going up (which often happens in spring markets), the value may not be as high as the market conditions are dictating. Be sure to discuss all of these factors with your agent when an appraisal comes in below the contract price.
THE BOTTOM LINE
The appraisal contingency is one of our favorites because it can protect you from overpaying for a house. However, removing it from a contract can also be a good way to strengthen your offer – if you know the home’s price is right or you know you have extra cash on hand in the event of a low appraisal.
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