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Appraisal Contingency vs Mortgage Contingency: Understanding the Key Differences



appraisal contingency vs mortgage contingency

Are you diving into the world of real estate and feeling bewildered by terms like “appraisal contingency” and “mortgage contingency”? Don’t worry, you’re not alone. Navigating the intricacies of home buying can be a bit overwhelming, especially when faced with these technical jargons.

But fear not! In this article, we’ll break down the differences between appraisal contingency and mortgage contingency in plain, easy-to-understand language.

By the time you finish reading, you’ll have a clear grasp of what each of these terms means and how they can affect your home-buying journey.

Appraisal Contingency Vs Mortgage Contingency: What’s The Difference?

Think of it this way: the appraisal contingency is all about the value of the house itself, while the mortgage contingency is about securing the funds you need to buy that house. They’re both crucial safety nets that give you room to breathe in the fast-paced world of real estate.

In essence, the appraisal contingency protects you from overpaying, while the mortgage contingency ensures you don’t end up without the necessary funds to close the deal. They both give you a chance to reevaluate your situation if things don’t go as planned.

In the next section, we have discussed in details about the differences. So, let’s explore them!

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Appraisal Contingency: The Value Safety Net

Imagine you’ve found your dream home. It has that cozy fireplace you’ve always wanted, a charming backyard, and a kitchen that feels like it’s straight out of a cooking show. But how can you be sure you’re not overpaying? That’s where the appraisal contingency steps in like a guardian angel.

An appraisal contingency is like having your cake and checking its price tag too. When you include this contingency in your offer, you’re saying, “Hey, I’m all in, but I want to make sure the house is worth what I’m paying.” If the home’s appraisal falls short of your offer, you have the option to renegotiate the price with the seller. It’s like having a safety net to prevent you from spending more than a house’s fair market value.

Mortgage Contingency: Securing Your Funding

Okay, so you’ve got your heart set on the perfect place, and the appraisal looks good. But hold your horses, there’s more to it. Even if you’ve been dreaming of marble countertops and a Jacuzzi bathtub, you’ll need cold hard cash to back up those dreams. This is where the mortgage contingency swoops in.

A mortgage contingency is your secret weapon to ensure you’re not left high and dry without financing. It’s like saying, “I’m ready to buy, but I need to make sure I can get a loan.” With this contingency, if your loan falls through and you can’t secure the funding you need, you’re not stuck buying the house. You can back out without losing your earnest money.

How an Appraisal Contingency Can Protect You When Buying a Home

An appraisal contingency acts like your financial safety net when you’re buying a home. It ensures that you won’t end up overpaying for the house if it turns out the value is lower than what you’re set to pay.

So, if there’s a significant difference between the agreed price and the actual value, the contingency kicks in to protect your wallet and helps you either renegotiate or even step away from the deal without losing your earnest money. It’s like having a financial backup plan in case things don’t line up as expected.

What to Do If the Home You’re Buying Doesn’t Appraise for the Purchase Price

Absolutely, finding out that the home you’re buying didn’t appraise for the purchase price can be a bit unsettling, but don’t worry – you have options. Here’s a step-by-step guide on what you can do:

  1. Stay Calm and Gather Information: Take a deep breath. First, understand the specifics of the appraisal report. Look into the factors that influenced the lower value, such as comparable properties used for the appraisal and any property-specific issues that were noted.
  2. Consult with Your Real Estate Agent: Reach out to your real estate agent. They are your trusted guide through this process. Discuss the appraisal report with them, and together, you can formulate a plan.
  3. Negotiate with the Seller: Your agent can help you present the appraisal findings to the seller. If the appraisal came in lower than the purchase price, you might have room to renegotiate the price to align more closely with the appraised value. The seller might be willing to work with you to make the deal work.
  4. Request Repairs or Upgrades: If the appraisal report highlighted specific issues that affected the value, consider requesting repairs or updates from the seller before moving forward. This could help bridge the gap between the appraised value and the purchase price.
  5. Explore Your Financing Options: If the seller is unwilling to adjust the price or make necessary repairs, you could explore the possibility of putting more money down to make up the difference. Discuss this with your lender to see if it’s feasible based on your financial situation.
  6. Reassess Your Decision: Given the new information, you should take a moment to reassess whether the property is still the right choice for you. Consider the revised price, any potential repairs, and how these factors align with your budget and overall vision for the home.
  7. Consider Walking Away: If negotiations and alternatives don’t seem to be viable options and the appraised value significantly differs from the purchase price, you might need to consider walking away from the deal. Fortunately, if you have an appraisal contingency in place, you can do this without losing your earnest money.

Remember, your real estate agent is there to support you every step of the way. Their expertise and guidance can make a significant difference in finding a solution that works for both parties involved. Stay patient, open-minded, and committed to making the best decision for your financial future.

How a Mortgage Contingency Can Protect You When Buying a Home

Now, let’s shift our focus to the mortgage contingency. Picture this: You’re on track to buy your dream home, but your mortgage application hits a roadblock. Perhaps your credit score takes an unexpected dip, or your financial situation changes.

Without a mortgage contingency, you might be obligated to proceed with the purchase even if you can’t secure the loan. This is where the mortgage contingency steps in, granting you the flexibility to withdraw from the deal if your financing falls through.

What to Do If Your Mortgage Contingency Is Not Met

If your mortgage contingency isn’t met, don’t panic. You can explore alternative financing options or work with your lender to resolve the issues at hand. If, despite your best efforts, the contingency is still not satisfied, you can back out of the deal with your earnest money intact, safeguarding you from potentially dire financial consequences.

Which is Better for the Buyer: an Appraisal Contingency or a Mortgage Contingency?

Now, the million-dollar question: Which contingency is more favorable for you as a buyer? Well, it depends on your circumstances. If you’re concerned about the home’s value and potential overpayment, an appraisal contingency is crucial.

On the other hand, if securing financing is your primary worry, a mortgage contingency is your ally. In many cases, having both contingencies in place offers comprehensive protection, ensuring you’re covered from all angles.

Frequently Asked Questions:

What is appraisal contingency?

An appraisal contingency is a stipulation in a real estate contract that allows a buyer to back out of a deal if the appraised value of the property falls short of the agreed-upon purchase price. This protects the buyer by providing an option to withdraw from the transaction without forfeiting their deposit.

What is an example of an appraisal contingency?

An example of an appraisal contingency is when you purchase a home for $500,000, but the appraisal value is only $450,000. This means you’d need to cover the $50,000 difference as per the appraisal contingency.

What is a mortgage contingency?

A mortgage contingency is a contract clause that permits buyers to withdraw from a home purchase agreement without consequences and get back their earnest money deposit if they’re unable to secure a mortgage.

What happens if appraisal contingency expires?

If the appraisal contingency expires and you don’t have the additional funds, you could be in breach of contract and risk losing your earnest money deposit. Appraisal contingencies are typically included in contracts to protect buyers in such situations.

Final Thought:

In the intricate dance of home buying, understanding terms like appraisal contingency vs mortgage contingency is paramount. An appraisal contingency guards you against overpaying for a property by addressing discrepancies in the home’s appraised value.

A mortgage contingency, on the other hand, provides an exit strategy if you can’t secure the necessary financing. Ultimately, the choice between the two depends on your unique situation, and in some cases, having both can provide maximum protection.

So, armed with this knowledge, you can approach your home-buying journey with confidence, knowing you’re well-equipped to navigate the contingencies that arise along the way.

Teacher-turned online blogger, Shirley is a full-time backyard homesteader based in Virginia. When she doesn't have her face buried in a book or striding in her garden, she's busy blogging about simple life hacks of the daily life. Shirley hold's a BA in commerce from University of California.

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