Watch Out For Appraisal Contingencies When Buying A Home

When buying a home the appraisal contingency addendum in a sales contract says the home buyer has a certain number of days (the date is negotiable) to get an appraisal that is equal to or greater than the sales price in the sales contract.

What happens with a low appraisal?

If the appraisal is less than the sales price the buyer can still continue with the transaction, but they would have to pay the difference between the contract price and the lower appraisal in cash, or the buyer can propose that the seller agree to drop the contract price to the lower appraised value, or the buyer can declare the contract null and void.

But what if the appraisal comes in at the contract price?

But assuming the appraisal comes in at the agreed upon sales price, or higher, there still may be problems.

The underwriter may asked for a “desk review” of the appraisal, which may find cause for lowering the value. The underwriter may even ask for a second appraisal, which may come in below the value of the first appraisal. These types of appraisal “cross checks” are usually only asked for on higher loan-to-value loans, but the underwriter may ask for them for any reason. So there is obviously a cause for concern in some cases.

Other issues

Another issue is that the turn around time of the appraisal is out of the control of the lender. There have been changes, the most important one is called the HVCC, that have caused turn times of appraisals to be uncertain.

Second appraisal needed?

There are answers to these problems. If the underwriter asks for a second appraisal this of course causes a question of whether to release the appraisal contingency based on only one appraisal when the second one may come in lower, and the loan may be rejected or altered. Usually if a buyer has proceeded in good faith, the seller will grant an extension to accommodate for the second appraisal, to allow for the extra time needed.

So if these problems occur it is not the end of the world. But buyers and sellers need to be aware of the potential for problems, should ask their lender a lot of questions up front as to the appraisal process, and should stay on top of the appraisal process the whole way.