What Does No Appraisal Contingency Mean?

The Appraisal Contingency

Real estate purchase agreements often include conditions, known as contingencies, that must be met. These clauses safeguard buyers and sellers, allowing withdrawal from a deal without penalty if specific circumstances are not satisfied. One common protection for a homebuyer is the appraisal contingency.

An appraisal contingency makes a home’s purchase dependent on the property appraising for at least the agreed-upon price. It protects the buyer from overpaying and ensures lenders do not finance more than market value. Lenders require an appraisal to confirm the home’s value justifies the loan, as the home serves as collateral for the mortgage.

If the home’s appraised value comes in lower than the contract price with an appraisal contingency, the buyer has several options. The buyer can renegotiate the sale price with the seller to match the appraised value, or the parties might agree to meet in the middle. Alternatively, the buyer can terminate the contract and receive their earnest money deposit back, or cover the difference between the appraised value and the purchase price out of their own funds.

Absence of an Appraisal Contingency

When a buyer makes an offer with “no appraisal contingency,” it means they waive this clause. The buyer agrees to proceed with the purchase regardless of the appraised value, accepting the risk that the home may appraise for less than the agreed price.

If the appraisal comes in lower than the contract price after waiving the contingency, the buyer remains obligated to complete the purchase at the higher agreed-upon price. This creates an “appraisal gap,” the difference between the lower appraised value and the higher purchase price.

Lenders will only finance a mortgage based on the lower of the appraised value or the purchase price. If the appraisal comes in low, the loan amount will be reduced to align with the appraised value. This creates a funding shortfall, as the buyer must still pay the full contract price.

Waiving this contingency can make an offer more attractive to sellers, particularly in competitive markets, as it signals stronger commitment and reduces the seller’s risk of the deal falling through. However, it places the financial burden of a low appraisal directly on the buyer. Without the contingency, the buyer loses the right to renegotiate the price or walk away and retain their earnest money deposit.

Buyer’s Financial Obligations

When a buyer agrees to “no appraisal contingency” and the property appraises for less than the purchase price, they are directly responsible for covering the resulting appraisal gap, meaning they must pay the difference between the lower appraised value and the higher contract price out of their own funds. This is in addition to their standard down payment and closing costs.

Buyers obtaining a mortgage will need to bring more cash to closing than anticipated. For example, if a home is purchased for $400,000 but appraises at $380,000, and the buyer planned a 20% down payment, the lender will base the loan on the $380,000 appraised value. The buyer would then cover the $20,000 appraisal gap in cash, along with their down payment.

Cash buyers, who do not rely on lender financing, are also affected by a low appraisal, though differently. While they do not face a lender reducing the loan amount, the appraisal still serves as a professional valuation of the asset. For cash buyers, a low appraisal indicates they might be paying more than market value, which could impact future resale or equity.

To manage the appraisal gap, buyers might consider strategies like increasing their cash down payment, utilizing personal savings, or exploring other funds. Some buyers include an “appraisal gap clause” in their offer, specifying a maximum amount they will pay above the appraised value, providing a predetermined limit to their out-of-pocket exposure. However, without such a clause or an appraisal contingency, the buyer is committed to the purchase price, regardless of the appraisal outcome.