What Is an Appraisal Contingency?

When buying a home, you’re bound to the deal once you’ve made an offer and the seller accepts. At that point, contingencies determine how the process moves forward. If the home appraises for less than you anticipated, an appraisal contingency can help protect you.

An appraisal contingency is a clause that allows home buyers to back out of an agreement if the property’s appraisal value is lower than the purchase price. While all contingencies protect home buyers, the appraisal contingency is among the most important safeguards. It gives buyers the ability to renegotiate the purchase price or walk away.

Understanding how an appraisal contingency works can help buyers make informed decisions during the home-buying process.

Do You Need an Appraisal Contingency?

In most home purchases today, lenders require an appraisal before approving a loan. They want to be confident they are not loaning more money than the property is worth, as this could put them at risk if the borrower defaults.

If the home is worth less than the agreed purchase price, the lender will typically either lend up to the appraised value or deny the loan. When that happens, buyers who cannot make up the difference may have to withdraw from the contract, risking the loss of their earnest money deposit.

An Appraisal Contingency Example

The following example shows how an appraisal contingency works.

Imagine you and a seller agree on a purchase price of $300,000. You plan to put down 10% ($30,000), and your lender approves financing for the remaining $270,000.After the appraisal is completed, the home is valued at $260,000. Since the lender cannot finance more than the property’s appraised value, the loan may be denied.

With an appraisal contingency in place, the buyer can withdraw from the purchase without forfeiting the earnest money deposit.

What to Do When an Appraisal Comes in Low

If the appraisal comes in lower than expected, buyers can explore a few possible paths forward.

Ask for a Second Opinion

You may request a second appraisal through their lender. This step is best taken only after explaining why the home may be worth more than the initial valuation. Perhaps the appraiser overlooked recent comps or high-value features that aren’t readily apparent, such as radiant floor heating.

Negotiate With the Seller

A low appraisal provides a valid reason to reopen price discussions. While the seller’s willingness to renegotiate could depend on the current market, they may agree to make up the difference by lowering the price, covering more closing costs, or providing other seller concessions.

Pay More Money

If the seller is unable to renegotiate and you still want to proceed, increasing the down payment is an option. Paying more upfront signals you’re a serious buyer and may increase the lender’s confidence in your ability to repay the loan. Plus, a larger down payment also reduces the amount needed to borrow, which can improve the chances of loan approval.

Walk Away From the Deal

If you have an appraisal contingency, you can walk away from the deal. In some cases, stepping back and looking at another property may be the most practical decision.

Let’s Talk About Your Next Move

Understanding your purchase agreement is key to protecting your investment. The Massey Team at Berkshire Hathaway HomeServices Select Properties walks buyers through each step of the home-buying process, helping them evaluate options, ask the right questions, and make informed decisions. Reach out today to start the conversation and get guidance built around your needs!