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The Role of the Appraisal Contingency in Real Estate Contracts

December 5, 2024 by Kay Monigold

When you’re buying a home, one important component of the real estate contract is the appraisal contingency. This clause protects the buyer in case the property’s appraisal comes in lower than the agreed-upon sale price. While it’s a common part of many real estate transactions, it’s often not fully understood. Here’s why it’s so important and how it can impact your purchase.

What is an Appraisal Contingency?

An appraisal contingency is a condition in the purchase agreement that allows the buyer to back out or renegotiate the deal if the property appraises for less than the offer price. Lenders require an appraisal to determine the market value of the home before approving a loan. If the appraisal comes in lower than expected, the buyer may be required to pay the difference in cash or negotiate a lower price with the seller.

Why is it Important?

The appraisal contingency serves as a safety net for buyers. If the home’s value comes in lower than expected, it ensures the buyer is not overpaying for the property. Without this contingency, the buyer would be responsible for paying the difference between the appraisal value and the agreed price out of pocket, which could be a significant financial burden. It also allows room for negotiations between the buyer and seller.

What Happens if the Appraisal Falls Short?

If the appraisal falls short of the agreed purchase price, several things can happen:

  1. Renegotiation of the Price: The buyer and seller can agree to lower the purchase price to match the appraisal value. This is the most common solution, especially if the buyer is unwilling or unable to pay the difference between the appraisal and the contract price.
  2. Buyer Pays the Difference: If the buyer still wants to purchase the home at the original price, they may decide to pay the difference in cash. This can happen if the buyer is confident that the home’s long-term value will increase or if they have the financial ability to cover the difference.
  3. Termination of the Contract: If the parties cannot reach an agreement and the buyer’s offer is contingent upon the appraisal value, the buyer may back out of the deal with their earnest money deposit returned.

When to Use an Appraisal Contingency

In a competitive market, buyers may sometimes decide to waive the appraisal contingency to make their offer more appealing to sellers. However, this is risky. Without the appraisal contingency, the buyer risks paying more than the home is worth, which could lead to financial difficulties down the road.

An experienced real estate agent and mortgage originator can help buyers understand the risks and benefits of an appraisal contingency, and guide them on how to use it to protect their investment.

The appraisal contingency is a valuable tool for homebuyers to ensure they don’t overpay for a property. Whether the appraisal comes in low or high, this clause provides buyers with options for renegotiation, or even the ability to walk away from the deal. Understanding the role of the appraisal contingency and how it fits into your overall home-buying strategy is crucial for making a sound investment.

Filed Under: Home Buyer Tips Tagged With: Appraisal Contingency, Home Buying , Real Estate Tips

Steps to Prepare for Future Home Financing and Year-End Financial Checklist

December 3, 2024 by Kay Monigold

As the year draws to a close, it’s the perfect time to take a step back and review your financial health, especially if you plan to purchase a home next year. Whether you’re a first-time buyer or looking to upgrade, proper preparation can make all the difference when securing a mortgage with favorable terms. Here’s a comprehensive checklist to ensure you’re financially ready for home financing in the year ahead.

1. Review Your Credit Score

Your credit score is one of the most important factors lenders will consider when deciding whether to approve your mortgage application and what interest rate to offer. Obtain a copy of your credit report from the three major bureaus—Equifax, Experian, and TransUnion. If your score isn’t where you want it to be, take time to dispute any errors, pay down high-interest debt, and avoid missing payments as you head into the new year.

2. Save for a Down Payment

The more you can put down, the better your mortgage terms will likely be. Ideally, aim for at least 20% of the home’s purchase price to avoid paying private mortgage insurance (PMI). If saving 20% seems daunting, consider setting up automatic transfers to your savings account to stay on track. Every little bit adds up over time.

3. Evaluate Your Debt-to-Income (DTI) Ratio

Mortgage lenders closely examine your debt-to-income (DTI) ratio, which measures the amount of your income that goes toward monthly debt payments. Lower DTI ratios indicate to lenders that you’re more likely to manage your mortgage payments responsibly. If your DTI is high, focus on paying off existing debt to improve your chances of securing favorable loan terms.

4. Calculate Your Budget

Knowing how much home you can afford is essential. Use online mortgage calculators to estimate your monthly mortgage payments based on different home prices. Keep in mind that your mortgage payment should ideally not exceed 28% to 30% of your gross monthly income. Additionally, factor in other costs like property taxes, homeowners insurance, and home maintenance to avoid overextending your budget.

5. Check Your Savings for Closing Costs

In addition to your down payment, be prepared for closing costs, typically ranging from 2% to 5% of the home’s purchase price. These fees include appraisal costs, title insurance, and lender fees. Having extra savings set aside for these expenses will help you avoid delays when it’s time to close on your home.

6. Get Pre-Approved for a Mortgage

Before you start shopping for homes, getting pre-approved for a mortgage is a good idea. This process involves a lender evaluating your creditworthiness and financial situation to determine how much you can borrow. A pre-approval letter shows sellers that you’re a serious buyer and can give you a competitive edge in a hot market.

7. Set Financial Goals for the Year Ahead

Take time to review your financial goals and create a plan to reach them. Whether it’s saving more for your down payment or paying off existing debt, a clear plan will help you stay on track. Revisit your goals every few months to ensure you’re making steady progress toward homeownership.

Reach out by phone or email to discuss your plans. We can help you understand the latest loan options available, interest rates, and more to simplify the home-buying process and secure a loan that best fits your needs.

Filed Under: Home Buyer Tips Tagged With: Financial Planning, Home Financing, Mortgage Tips

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Our Team

Kay MonigoldKay Monigold
Owner/Mortgage Broker/Residential Mortgage Loan Originator
NMLS#1086176

Steven LoweSteven P Lowe, Sr
Residential Mortgage Loan Originator
NMLS #1085638

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