Some advertisements and offers on this page are from advertisers who pay us. That may influence which products we write about, but it does not affect what we write about them. Here's an explanation of how we make money and our Advertiser Disclosure.
An appraisal contingency is a clause in a real estate purchase contract that provides options for buyers if the estimated value of a property is lower than their offer. When you borrow money to buy a house, mortgage lenders typically require an appraisal — an evaluation of the property’s value — to be sure that they are not lending more than a home is worth.
The word “contingency” refers to a condition that must be met before the sale goes through. With an appraisal contingency, if the property’s appraised value is less than your offer amount, you can cancel or renegotiate your contract without losing your deposit.
In this article:
Dig deeper: What is an appraisal, and how much does it cost?
How does an appraisal contingency work?
When a seller has accepted your offer, one of the steps before the real estate transaction can go through is for your lender to hire a licensed appraiser to generate an estimated value for the home. An appraisal contingency clause is a legal element of the purchase agreement that explains what happens after the appraisal is complete.
The home’s appraised value is based on the recent sales price of comparable homes to the one you plan to buy in terms of location, size, and condition. Generally, if you have an appraisal contingency and the home's value is lower than the agreed-upon purchase price, you’ll have options to consider. You can choose to back out of the contract and get your earnest money deposit back, negotiate with the seller to lower the price to the appraised amount, or choose to pay cash to make up the difference between the appraised value and the sales price if you still want to buy it.
Learn more: Real estate contingencies — what they are and how they protect buyers
Appraisal contingency example
Let’s say you and the seller have agreed on a sales price of $400,000, and you plan to make a down payment of $40,000. You’ll need to borrow $360,000 for the purchase.
But if the appraised value is determined to be $350,000, you will have a gap of $10,000. Most lenders will not loan more than the appraised value, so you must make up that $10,000 difference by making a larger down payment or negotiating with the sellers for a reduced price. Otherwise, you can walk away from the purchase.
Read more: What’s the difference between a home’s appraised value vs. market value?
When should you use an appraisal contingency?
As a buyer, it’s wise to use an appraisal contingency in any real estate contract because it protects you against paying more for a property than it’s worth. Also, the appraisal contingency allows you to get your earnest money deposit returned if the deal is canceled because of an appraisal issue.
An appraisal contingency can be especially critical in a market where there are more buyers than sellers because that can generate competition and even bidding wars that drive up prices. Buyers with limited cash and other financial resources, particularly first-time buyers, benefit the most from this protection for their deposit money.
Dig deeper: What is earnest money when buying a house?
When should you consider waiving an appraisal contingency?
While an appraisal contingency offers protection for your good faith deposit, there are times when you may want to waive that contingency. For example:
-
If you are paying cash and don’t need a mortgage loan, you won’t have a lender that requires you to schedule an appraisal. You can get an appraisal to confirm the purchase price, but it isn’t mandatory.
-
If you’re not concerned about the purchase price because you’re confident about the home’s value or want the house regardless of the cost, you may decide to waive the appraisal contingency.
-
In a highly competitive market, waiving the contingency may make your offer more attractive to sellers. In that case, you need to be prepared with additional cash if the appraisal is too low or lose your deposit if the value gap is too wide.
Waiving the appraisal contingency is a big decision, so consult your real estate agent or mortgage professional before taking this leap.
What happens if an appraisal is low?
Your appraisal may show that the home is worth the amount you agreed to pay. If the appraised value is higher than the purchase price, then you’re starting out with equity in your home from day one. (Yay!) But what do you do if the appraised amount is lower than what you offered? Thankfully, you have several options.
Whether or not you have an appraisal contingency, you can:
-
Ask for the appraisal to be reconsidered. You, the seller, or the seller’s agent can provide information to the lender who hired the appraiser to share with the professional why the property value should be higher. For example, sales prices on nearby comparable properties or information about upgrades that were missing from the appraisal can be documented.
-
Ask for a second appraisal. You’ll need to pay for the additional appraisal, and there’s no guarantee it will come back higher, but this can be worth a try if you have reason to believe the appraiser was mistaken.
If you have an appraisal contingency, you can:
-
Cancel the contract. With the signed appraisal contingency, you should get your earnest money deposit back.
-
Pay more. If you have the funds and want the property regardless of the estimated value, you can pay cash to make up for the gap between your purchase price and the appraised value.
-
Renegotiate with the seller. The seller may be willing to accept less for the property to have the sale go through. Sometimes, you and the seller can split the money needed to bridge the appraisal gap.
If you waived appraisal contingency, you can:
-
Cancel the contract. If you waived the contingency, the seller would have the right to keep your deposit.
-
Pay more. Your lender may deny the loan unless you pay the additional cash needed to cover the gap between the appraised value and the purchase price.
Keep reading: What happens if an appraisal comes back lower than the offer?
Appraisal contingency FAQs
Is an appraisal contingency mandatory?
No. An appraisal contingency is typically part of a purchase contract, but you can choose to waive it by striking it from the contract. Sometimes, an appraisal contingency waiver form is required and must be signed by the buyer and seller.
How long does an appraisal contingency last?
The appraisal contingency period is typically part of your contract negotiations, after the seller accepts your offer but before closing day. Often, the appraisal contingency period lasts seven to 10 days from when your purchase contract is signed to give your lender time to hire an appraiser and provide the appraisal report.
What happens if your appraisal comes in high?
A home appraisal showing that the property you’re buying is worth more than you are paying is good news. That means you don’t need to bring additional cash to buy it, and you have additional equity in the property as soon as you own it.
Is an appraisal contingency the same as a financing contingency or an inspection contingency?
No. A home inspection contingency allows you to hire a home inspector to review the property's condition. A financing contingency makes your offer dependent on obtaining financing for the purchase within a specific time window. The appraisal contingency is only about confirming the value of the property.
This article was edited by Laura Grace Tarpley.
