Waiving Appraisal Contingency? More Down or Switch to FHA
Appraisals are used to estimate a property’s value. Appraisers use the property’s location, condition, and the current market to determine its appraised value. The Appraisal Contingency allows the buyer to walk away from the purchase contract if the property’s appraisal comes in lower than the contract price and the seller is unwilling to come down from the contract price. If buyers decide to waive the appraisal contingency, they are agreeing to pay the full sales price—even if the appraisal comes in lower than the property’s contract price.
Waive Appraisal Contingencies – Switch To FHA
We had many multiple offer situations last year that required borrowers to waive appraisal contingencies. Borrowers who waive appraisal contingencies have several options if an appraisal comes in below the purchase price:
- Order a new appraisal with a different lender. This option is often ineffective, however, if there are simply no adequate comparable sales in a hot market.
- Put more money down in order to make up the difference between the purchase price and the adjusted loan amount that will be tied to the low appraisal. This too is often not an option for borrowers unless they have substantial liquidity.
- Adjust the financing from 20% down, for example, to 3.5%, 5%, or 10% down. While this is not the most desirable option, it is often the only choice borrowers have if sellers are not willing to adjust the contract price to match a low appraisal. This is the option most of our borrowers chose last year.
For example, if a buyer only has $50,000 to put down on a property with a $500,000 contract price and the appraisal comes in at $475,000, the buyer will have to get FHA financing. He will then get a loan equal to 96.5% of $475,000 (the appraised value) and then give the seller a 3.5% down payment plus the $25,000 difference between the appraised value and the contract price.
Questions? Keep In Touch With JVM Lending
If you have questions about the homebuying process or appraisal contingencies, contact JVM Lending. Our expert Mortgage Analysts and Client Advisors are available 7 days a week to answer questions and guide you through the homebuying process.
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