Financing & Appraisal Contingency
If you’re planning on buying your home using a mortgage, you’re going to want to elect the financing contingency. This contingency gives you time to apply for and receive a loan in order to purchase the home. It says that, if for some reason you’re unable to receive financing, you have the right to look for alternative sources or to back out of the sale.
Many buyers, especially first-timers, make the mistake of thinking that their financing is set in stone once they receive a pre-approval. Unfortunately, that is not the case. A pre-approval is not a guarantee of a loan. It’s merely the start of the process. From there, you still have to apply for a specific loan program and go through the underwriting process.
The appraisal contingency goes hand-in-hand with the financing contingency. In fact, receiving a satisfactory appraisal is usually one of the conditions that the mortgage company has for granting you a loan. Remember, an appraisal determines the fair market value of the home. The appraisal contingency ensures that you’re protected if the sale price doesn’t fall in line with whatever the fair market value is determined to be.
It works like this: Let’s say you and the seller agreed to sell the house for $200,000, but the appraisal only comes at $180,000. Since the mortgage company is only allowed to loan you up to the fair market value of the home, there’s a $20,000 difference that you’re responsible for making up. In the best-case scenario, you’ll be able to renegotiate the sale price with the seller or to find additional financing. However, if both those options fall through, the appraisal contingency allows you to back away from the deal, unscathed. From Forbes Media LLC