What is an Appraisal Contingency in Real Estate?

What is an Appraisal Contingency in Real Estate

When you buy a home in Tampa Bay, your real estate agent will most likely build an appraisal contingency into your purchase contract. But what is that, and how does it work?

What is an Appraisal Contingency in Real Estate?

Before a lender will let you borrow the money to purchase a home, it will send an appraiser to the home to determine how much it’s worth. The appraiser is an independent third party that you pay (but the lender chooses). This professional home evaluator will compare the home you want to buy to other, similar homes in the same area to determine how much it’s worth. The appraiser will look at the home’s size, number of bedrooms and bathrooms, lot size, improvements and amenities before settling on a value.

The appraiser will then send a report to your lender. The lender wants to see that you are asking to borrow an amount of money that is equal to or less than the appraiser’s value. That’s because lenders don’t want to give borrowers more money then a home is worth; statistically, homeowners are more likely to walk away and default on their loans when they are paying more for a home than it’s actually worth. Lenders don’t like to take those kinds of chances, so they’re very careful about lending just the right amount.

That’s where the appraisal contingency comes in. If the appraiser says that the home is worth less than what the seller is asking for it, your lender isn’t going to finance you for the full amount. In that case, with an appraisal contingency in your contract, you can walk away from the deal unscathed (meaning that you don’t lose your earnest money deposit).

Without this contingency in your contract, you may still be able to walk away from the deal – but generally, you’ll forfeit your earnest money deposit to the seller. Alternatively, you have the options of asking the seller to lower the asking price or coming up with the additional funding on your own.

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