What Is an Appraisal Contingency and Do You Need One?

When you make an offer on a home, the purchase contract can include conditions that must be met for the deal to move forward. These are called contingencies, and they are some of the most important protections a buyer has. One that often gets less attention than it deserves is the appraisal contingency.

A Quick Look at Contingencies

A contingency is a condition written into your contract. If it is not satisfied, you can typically back out without penalty and keep your earnest money, as long as you follow the contract’s deadlines and procedures. The seller has to agree to include them, and they usually have time limits. The three most common are:

• Inspection contingency: lets you have the home inspected and negotiate repairs or walk away if serious problems turn up.
• Financing contingency: protects you if your loan is not approved.
• Appraisal contingency: protects you if the home’s appraised value comes in below your purchase price.

Why the Appraisal Matters to Your Loan

Most lenders require an independent appraisal before approving a mortgage. The appraiser estimates the home’s market value using its condition, features and recent sales of similar homes nearby. Lenders base the loan on the lower of the purchase price or the appraised value. So if the appraisal comes in low, your lender will not simply lend more to make up the difference.

Imagine you agree to pay a certain price, and the appraisal comes back noticeably lower. Your lender will calculate your loan based on that lower value, which means you would need to cover the gap some other way.

Your Options After a Low Appraisal

If you have an appraisal contingency, you have several paths:

1. Renegotiate the price. Ask the seller to lower the price to the appraised value or meet you somewhere in the middle. Sellers often agree, since the next buyer’s appraisal may come in low too.
2. Bring more cash. Cover the difference with a larger down payment, if you have the funds and still believe the home is worth it.
3. Challenge the appraisal. Your lender may allow a reconsideration of value if you can point to factual errors or relevant comparable sales the appraiser missed.
4. Walk away. If you cannot reach an agreement, the contingency lets you cancel and typically recover your earnest money.

Without the contingency, you may be obligated to complete the purchase and cover the shortfall yourself, or risk losing your deposit.

Watch the Deadlines

An appraisal contingency only protects you if you act within the time frame your contract sets. Appraisals can take a while to schedule, especially in busy seasons, so ask your loan officer to order it promptly and keep your agent informed. If the deadline is approaching and the report is not back yet, your agent may be able to request an extension from the seller in writing. Missing a deadline could mean losing the protection you negotiated for.

Should You Ever Waive It?

In competitive markets, some buyers waive the appraisal contingency to make their offer more attractive. Sellers like the certainty. But waiving it shifts the risk to you. Before you consider it, ask yourself:

• Do I have extra cash available to cover a potential gap?
• How confident am I that the price is supported by recent sales?
• Would I be comfortable paying more than the appraised value?

A middle-ground approach is a partial waiver, where you agree to cover a gap up to a set amount. Your agent can help you structure this.

Plan Ahead

Knowing your numbers before you shop makes these decisions much easier. Use our mortgage calculator to see how different prices and down payments affect your payment, and learn more about your financing in our loan program comparison.

Have questions about appraisals or contingencies before you make an offer? Reach out to FLO Mortgage and a loan officer will help you think it through.

This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.