The inclusion of an appraisal contingency in a sales agreement provides the buyer with the option to renegotiate or withdraw from the deal if the home's valuation falls short of the agreed-upon sales price.
The appraisal contingency is removed when the valuation meets or exceeds the sales price. In case the appraisal comes in lower, it opens up the opportunity for the buyer and seller to discuss and potentially adjust the terms. If the seller aligns the price with the appraised value, the buyer is obligated to move forward with the purchase.
In the absence of this safeguard, buyers are bound to proceed even if the appraisal falls below the sales price. With down payments of 20% or more, lenders might need to make adjustments to the loan terms, potentially necessitating Private Mortgage Insurance (PMI) and impacting the upfront payment and monthly installments.
Opting to waive this contingency, particularly with less than a 20% down payment, exposes buyers to the responsibility of bridging the gap between the sale price and the appraised value.
Eliminating the appraisal contingency to stay competitive introduces uncertainty tied to the appraiser's assessment. While agents can make educated guesses on appraisal outcomes based on comparable sales, there is no certainty. In highly competitive markets, waiving the contingency might be necessary, but a recourse exists for challenging low appraisals, even though favorable outcomes are infrequent.
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