It’s a happy and exciting time – you’re buying a home in Albuquerque! Everything seems to go smoothly at first. Your offer is accepted, the contracts are signed and the deposit is paid. Now comes the appraisal. This is where the problems creep in. Now that the home is appraised, it’s appraised for less than what you offered. Because of this, the bank won’t give you the loan you need. No buyer wants to go through this. There is a way to protect yourself though – appraisal contingencies.
You may not have heard of appraisal contingencies before. What are they? They are conditions that have to be met on a real estate contract before it becomes legally binding. Most real estate contract include these conditions:
The appraisal contingency: This states that the home has to be appraised at the sale price or higher. This will help keep the mortgage from falling through.
The finance contingency: This mandates that the deal is based on the bank granting the loan.
The inspection contingency: The home must pass inspection.
These conditions have to be met within a certain amount of time, or the deal is a no go and you can back out legally and get your deposit back.
But how does an appraisal contingency work? The bank hires an appraiser to determine the fair market value of the home based on similar homes in the area known as comparative sales, or comps. Normally the bank will only loan the amount that the home is appraised for. Therefore if the appraisal is lower than what the seller is asking, you can walk away from the deal and get your money back if the seller refuses to lower the price.
But isn’t this the same thing as a finance contingency? Almost. If the bank agrees to a smaller loan that meets the finance contingency then seller can demand that you make up the difference from your own pocket. That’s where the appraisal contingency protects you, otherwise you have to come up with that extra money, or be in breech of contract and possibly lose your deposit. That’s why you should have both the appraisal and finance contingency in a contract.
What if you still want the home if the appraisal is too low and the loan is declined? You can ask the bank for another assessment and show evidence that represents what you believe makes the home worth more.
Does this mean you should always have contingencies in a real estate contract? Remember that sellers usually get offers from multiple buyers. The easier the deal is for the seller (by not having contingencies), the better chance you have of getting the home. But you run the risk that you won’t get the loan you need. In the end, it’s up to you, based on the market and what risks you want to take either way.