Understanding an Appraisal Contingency

Protecting Your Home Purchase with Contingencies

When buying a new home, you have the opportunity to include several contingencies in the purchase contract to safeguard your interests during the process.

A contingency is a condition that must be met for the contract to remain valid. If it is not met to the buyer’s satisfaction, they can back out of the sale without penalty. While there are three main types, you can include a contingency for almost anything, as long as the seller agrees.

The Appraisal Contingency

Most lenders require an independent third-party appraisal of the home before they will approve a home loan. This ensures they are not agreeing to loan more money than the home is worth. If you have an appraisal contingency in your contract, you can walk away from the deal and get your deposit back if you and the seller cannot agree on a new price after discovering the appraisal is lower than the original price. Consulting with Oak Capital Mortgage can help you understand the importance of appraisals in securing your loan.

The Financing Contingency

Chances are you will use a mortgage to purchase your home. If you are unable to get approved for a mortgage for the full amount needed, this contingency allows you to back out of the sale and get your deposit back. Having a pre-approval or pre-qualification letter can give you an idea of how much house you can buy. However, until your application goes through underwriting and is officially approved, nothing is certain. This contingency protects you in case circumstances change. Oak Capital Mortgage offers guidance on obtaining pre-approval to strengthen your offer.

The Home Inspection Contingency

Worried that the home you love has major structural issues or damage? The home inspection contingency allows you to pass on the home after receiving a thorough inspection report from a professional. Most homebuyers are not home repair experts and may not know what to look for, but a professional home inspector does. Including this contingency in your purchase contract can provide peace of mind. If the inspection finds issues, you can negotiate with the seller to fix them, lower the sales price, or get your deposit back and keep looking if you cannot agree.

What Happens If the Appraisal is Too Low?

Most lenders will only loan up to the home’s appraised value. If you have agreed on a purchase price of $500,000 but the home appraises for $480,000, you have a few options:

• Pay the difference with a bigger down payment.
• Ask the seller to lower the purchase price.
• Use your appraisal contingency to get your deposit back and start looking for another house.

If you have an appraisal contingency, the seller may be more willing to lower the purchase price rather than risk losing the sale altogether. This contingency can work in your favor in multiple ways. In a highly competitive seller’s market, leaving an appraisal contingency out of your offer may make you a more attractive buyer. Sellers know that you are willing to do whatever it takes to finalize the purchase of the home.

Conclusion

Including contingencies in your home purchase contract is a smart way to protect your investment and ensure a smoother buying process. By working with a knowledgeable mortgage broker like Oak Capital Mortgage, you can better understand these contingencies and how to use them to your advantage. Whether it’s securing financing, ensuring a fair appraisal, or confirming the home’s condition, contingencies provide crucial safeguards. Happy house hunting!