In today’s real estate market, many people are having a difficult time finding that perfect house at an affordable price. Some have even offered over the listing price to win the bidding war in multiple offers.
How can buyers feel secure and protected, as they navigate the housing market? Having a contingency condition with an offer is often used with offers as a way of safeguarding the buyer and allowing them to get their earnest money deposit back.
There are several types of contingencies that buyers rely on, two of which are the Appraisal Contingency and Mortgage Contingency. However, a contingency condition may not always be accepted by the seller, especially in a seller’s market.
What are Contingencies?
Contingencies are certain conditions buyers sets as part of their offer that must be met before the buyer will proceed with the purchase of a property. Having the contingency will allow the buyer to get any earnest money back and the ability to cancel the purchase contract on the house if the condition set is not met. If a contingency is not made as part of the offer, the buyer risks losing any money deposited in escrow if they choose to back out of the purchase due to financing issues or other issues with the house.
An Appraisal contingency is a clause included with the offer to purchase that allows the buyer to terminate or back out of the purchase contract if the home appraises for less than the purchase price of the home. With bidding wars and multiple offers all too common, many buyers are offering purchase prices above the list price in hopes of having the winning offer and securing their dream home.
Although they may have won the bidding war, many buyers may find that the resale value of their home is far from what they actually paid. Whether paying cash or financing, hiring a licensed professional or appraiser during due diligence is always a good idea. An appraiser will look at the home and give a good estimate of what it is worth in a written appraisal report.
How Appraisal Contingencies Protect Buyers
Appraisal contingencies protect the buyer in the case an appraisal comes back lower than the purchase price of the home. The buyer has a couple options to help push their purchase through.
Buyers can ask the seller to lower the price of the home to meet the appraised value, or the buyer may terminate the contract with no penalties and get their earnest money deposit refunded. While terminating the contract will not actually help the buyer obtain their dream home, having an appraisal contingency will protect them from being obligated to pay more money for a home than it is worth
Do You Need an Appraisal Contingency?
Having an appraisal contingency is not always necessary when purchasing a property. In a seller’s market, a seller will often have multiple offers from which to choose, so they will most likely choose one that has no contingencies or strings attached.
Making an offer with no contingencies will strengthen the offer so many buyers may choose to waive the appraisal contingency. Many of these buyers pay cash or make a large down payment of more than 25% of the purchase price with their offer so an appraisal or mortgage contingency is usually not necessary.
Others may offer to purchase a property that they plan to redevelop or restructure so the existing value of the property is not as important to them.
When financing a property, like an appraisal contingency, a mortgage contingency can be included with the offer. As part of the financing process, lenders will require that an appraisal be done on the home being purchased to ensure that the amount of money loaned is not higher than what the property is worth.
Contingencies For Low Appraisals
If the appraisal comes in at a lower amount than the sales price the buyer may not be able to secure a loan. By having the Mortgage contingency, the buyer has more power in asking the seller to lower the price or pay closing costs and even make needed repairs that will increase the value of the house.
If the buyer and seller cannot come to an agreement and the buyer cannot obtain the loan, then the buyer has the right to cancel the contract and receive a refund for the earnest money deposited. Whether the buyer makes a cash offer or needs financing, an appraisal contingency and mortgage contingency can be very beneficial by protecting the buyer from purchasing a home at a higher price than it is worth and help in securing a loan. This type of protection is especially good for first-time homebuyers who are new to the process.
When to Use Mortgage & Appraisal Contingencies
Finding the perfect home is an expensive process and no one wants to buy a home that costs more than its appraised value. As buyers navigate the real estate market, appraisal and mortgage contingencies can be good tools to have as part of the offer to purchase contract. They are there to protect the buyer by helping secure a loan and by giving them an option to walk away from a property without losing their earnest money deposit if the appraised value of a home does not measure up to the purchase price offered.