Should I Waive the Appraisal Contingency?
Considering waiving your home appraisal contingency? Understand the critical financial implications and risks before making this complex real estate decision.
A home appraisal provides an objective, professional assessment of a property’s market value. This evaluation is a standard part of most home purchase processes and informs parties about the property’s worth. Faced with intense competition, some buyers consider waiving the appraisal contingency to enhance their offer.
Understanding the Appraisal Contingency
An appraisal contingency is a clause within a real estate purchase agreement. This provision protects the buyer by allowing them to withdraw from the contract without penalty if the home’s appraised value is lower than the agreed-upon purchase price. It acts as a financial safeguard, ensuring the buyer does not overpay.
The contingency also safeguards the lender. Lenders base the loan amount on the appraised value, preventing them from lending more than the collateral is worth. This helps maintain stability in lending practices.
What Waiving an Appraisal Entails
To waive the appraisal contingency means the buyer agrees to proceed with the home purchase regardless of the appraised value. This implies the buyer is prepared to cover any difference between the contract price and the appraised value directly out of pocket. Such a decision removes a standard buyer protection from the purchase agreement.
Buyers often consider waiving this contingency in highly competitive real estate markets. Removing conditions from an offer can make it more attractive to sellers, who prefer certainty. Waiving the appraisal contingency is a binding decision that eliminates the option to renegotiate or exit the contract based on a low appraisal.
Financial Ramifications of Waiving Appraisal
When a buyer waives the appraisal contingency and the property appraises for less than the agreed-upon purchase price, a financial gap emerges. Lenders only extend a mortgage loan up to the appraised value. The buyer is responsible for covering the entire appraisal gap in cash, in addition to their down payment and closing costs. For example, if a home is offered at $400,000 but appraises at $380,000, the buyer must bring an additional $20,000 to closing.
The buyer might attempt to renegotiate the purchase price with the seller, but the seller is not obligated to agree. If the buyer cannot cover the appraisal gap, and the seller refuses to renegotiate, the buyer may be forced to withdraw. In such a situation, the buyer risks forfeiting their earnest money deposit, which ranges from 1% to 5% of the purchase price. This loss occurs because the buyer is backing out for a reason no longer protected by a contingency.
Essential Factors for Your Decision
Before waiving an appraisal contingency, buyers should assess their financial liquidity. Determine if readily available cash reserves can comfortably cover a potential appraisal gap without jeopardizing financial stability. This assessment includes evaluating how an additional cash requirement would impact personal savings or other investment plans.
Market conditions play a significant role. In a strong seller’s market, waiving the contingency might make an offer more competitive. In a less competitive market, the need for this protection diminishes. The specific property type and its condition warrant consideration. Properties with numerous recent comparable sales may have a lower risk of a low appraisal than unique or distressed properties where comparable data is scarce.
Confirm with your lender if waiving the appraisal contingency is an option for your loan program. Some loan types, such as FHA or VA loans, have stricter appraisal requirements that may not allow for waivers. A buyer’s personal comfort level with the financial exposure is a determining factor. Understanding and accepting the potential for additional out-of-pocket expenses is vital before committing.