If the appraisal is lower than the purchase price, your lender is likely to lower the amount you can borrow. So you'll have to pay more out of pocket or cause the seller to lower their selling price. A home appraisal contingency is an addition to the offer agreement submitted by the buyer. It states that if the appraisal is low, the buyer has the option to withdraw from the deal and recover their guarantee money.
When you are looking for a home and find one that you want to make an offer for, the mortgage lender generally requests an appraisal of the property. Similarly, requesting a new appraisal is no guarantee of a higher value, and you will have to pay two appraisal bills. Ideally, the lender wants to see an appraised value that is equal to or greater than the price agreed by the buyer and seller, but sometimes the appraisal is lower. Your appraisal affects your refinance loan because it helps measure the amount of net worth of your home.
An appraisal contingency provides integrated protection for buyers in the event that the appraisal falls below the bid price again. Mortgage lenders use the appraised value of a home to calculate the loan-to-value ratio (LTV), which is an important component in the underwriting process. Appraisals are a standard part of the homebuying process and protect the buyer's lender from offering too much money for an unworthwhile home. Then, for each comparable home, appraisers search public records for home descriptions, sales data, and other available information about a property.
For the buyer, the seller who takes care of a few more installments and ends up in the house can compensate for the difference between the sale price and the appraised price. With the exception of simplified refinance loans without an appraisal, almost all mortgage applications require a home appraisal. The appraisal occurs sometime between the time the home goes into effect of the contract and the projected closing date. Whether you're buying, selling, or refinancing, a home appraisal that's too low could jeopardize the entire transaction.
Appraisal contingencies are also sometimes used to renegotiate or exit contracts after an appraiser identifies necessary repairs, such as chipped paint or broken windows. Homebuyer Erik Nilsson decided to continue his recent purchase of a home that had a low appraisal by diving into his savings.