Risks Of Waiving The Appraisal Contingency
In real estate, the more competitive the situation, the more people think about waiving contingencies, settling faster, and trying to be better than all the other offers. One of the biggest is waiving the appraisal contingency. It adds risk, but in this video, we tell you everything you should consider before you do that yourself.
What Is An Appraisal Contingency?
An appraisal contingency is a clause within your contract that says, I want to buy your house, and I want to pay $X, but only if it appraises for that much. Of course, a seller looks at that, and maybe it leaves some doubt. Perhaps they think it won't appraise for that much. If someone's looking for an edge, they might waive that appraisal contingency to remove the seller’s perceived risk. And even more so, some people are starting to pay projected prices in hot markets. If a home buyer feels that prices will go up 5 to 6% this year, they might be willing to pay 3% more than the appraisal to win that house and lock in that interest rate. But the reality is not everyone should or can waive that contingency.
Analyzing Your Risk
So how should you analyze the risk before considering waiving the appraisal contingency?
It’s best to start by figuring out how your mortgage changes if the value is lower than the sale price. There is a misconception that when it comes in low, you must pay dollar for dollar out of pocket for whatever that difference is. It's not quite the case all the time. In some cases, you might add a little bit of private mortgage insurance, or maybe the PMI gets a little more expensive, or maybe your rate goes up a little bit, or perhaps we add a second mortgage. There are ways of managing and mitigating that risk of doing so.
The larger the down payment, the more likely you can waive that contingency. But if you are using a low-down payment mortgage, think 3%-5% down, you probably shouldn't. Or maybe you can look at your complete credit profile from your cash and income and find some dollar amount where you say, “I'm willing to pay $X over the appraised value.” Focusing on your best offer is the key to winning in competitive markets!
If you are thinking about buying a house and hearing everyone say, “waive everything,” definitely speak to a Certified Mortgage Advisor like us. The goal should be to unpack all risks before you find yourself stuck and have your earnest money deposit at risk.
