Why You Should Include an Appraisal Contingency in Your Offer

4 minutes read

Making an offer on a home is a huge deal. Having the seller accept that offer is an even bigger deal. In a matter of weeks or months, you could become a homeowner. However, before you start jumping for joy, you should understand the different contingencies you should include in your contract. One of the most important is the appraisal contingency. Without it, you could find yourself in deep financial trouble or worse yet, have legal troubles on your hand.


Just like any other contingency, an appraisal contingency gives you a way out of the purchase contractshould the appraised value not come back as high as the purchase price. You might wonder why this would matter – there’s one simple reason, the financing.

Compare Offers from Several Mortgage Lenders.

A lender can only lend you as much as the value of the home. If you agreed to pay more than the value of the home, the difference is on you. The unfortunate part is that you won’t know the appraised value until long after you signed the contract. It takes the lender to order the appraisal and the appraiser to get in contact with the seller to actually do it. By this point, your contract is legal and binding, leaving you in the lurches for financing.

The appraisal contingency gives you a certain amount of time to get out of the purchase contract without any legal or financial consequences. You must have the appraised value back in your hands before the expiration date of the contingency, though, that’s the only problem.


Here’s how the appraisal contingency can you help you. Let’s look at an example.

John puts a bid on a house for $200,000. The seller accepts the bid and they both sign the purchase contract. The contract is now a binding legal agreement. John did not put any contingencies in the contract, so he is ‘required’ to purchase the home by the date in the contract. John plans to put down 3.5% on the property, as he is getting FHA financing. At this point, his down payment is $7,000.

When the appraisal comes back, it shows that the home John is to purchase is only worth $185,000. John was supposed to secure financing for $193,000. The home doesn’t support that size loan. Because John did not add a contingency to the contract, he still has to buy it. This means he has to come up with the difference in the down payment. The lender will be able to provide financing for $180,375. If the contract stands as is, John would need $19,625 for a down payment.

Click to See the Latest Mortgage Rates.

Now, John could back out of the contract, but since he is in breach of contract, he would lose any earnest money he put down on the home.

Now, if John had the appraisal contingency on the contract and the appraisal came back short, like it did, he would not have to buy the home. He would have two options:

Try to renegotiate with the seller Back out of the contract

If John decided to back out of the contract, he would be able to get his earnest money back and walk away from the sale.


Aside from the appraisal contingency, there are others you have to consider as well. The appraisal is probably the most important as it has a direct bearing on your loan. The others are also impactful though and they include:

Inspection contingency – This gives you a specific period to secure an inspection and review the results. If something comes back as dangerous or that you just don’t like, you can ask the seller to fix it or back out of the contract without issue. Financing contingency – This gives you time to secure proper financing. If something pops up that makes the lender rescind their offer to provide you with financing, you can back out of the contract without a problem.

Any type of contingency can protect you in a very costly purchase. If something doesn’t go right, you can back out of the contract, keeping your money in your pocket. Talk to an attorney about the contingencies that suit your situation the most, including the appraisal contingency. This way you have your self-protected no matter what happens moving forward.

Facebook Twitter LinkedIn Telegram Whatsapp Pocket

Related Posts:

An appraisal is necessary to ensure there is adequate collateral in a home. Your lender will require the appraisal prior to clearing your loan to close. At what point does the lender order the appraisal, though? Looking for Current Mortgage Interest Rates? Cli...
More homeowners and homebuyers can hope for appraisal-free transactions as Fannie Mae’s property inspection waiver is in full swing. Approvals on conventional loans with no appraisal are expected to climb, reducing the costs and time it takes to get a mortgage...
There is no formula for directly measuring property value. Various factors are at play and more often than not, they are at a continuous state of fluctuation. One necessary distinction that has to be made, however, is the difference between what you call home ...
Most lenders don’t require a home inspection, but it’s highly recommended so that you know what you are buying. Just because your lender requires an appraisal, doesn’t mean you’ll know if something is wrong with the home. The appraiser’s job is to determine th...
Should you make an offer on the first home you love? Is it better to wait until you’ve looked at multiple homes? How do you know what to do? Looking for Current Mortgage Interest Rates? Click Here. Today, it’s not unusual for home shoppers to look at hundreds ...
Refinance options are depleting, and lenders are more concerned with how well your mortgage performs. Qualifying for a mortgage refinance these days are a lot harder than it has been in the past because of limited options. Some lenders offer a streamlined alte...