Have you heard about buyers waiving their appraisal contingencies? It’s becoming increasingly common in our tough market, and many industry experts say it can make or break your offer. Today I want to tell you what you need to know about appraisal contingencies before you decide to waive yours.
First, the appraisal contingency is designed to protect both you and your lender. It helps you by protecting you from unexpectedly overpaying for a home. It helps your lender in a few ways. First, it protects your lender from collateralizing a property at a loan-to-value ratio that’s much higher than expected. Second, it lets your lender know if the property has marketability issues.
When you waive your appraisal contingency, you waive your rights to back out of a contract based on what comes up in the appraisal. It’s important to remember that your lender will probably still require an appraisal for your loan. However, no matter what comes up, you’re now legally obligated to follow through with the purchase.
Don’t get me wrong; you can still buy a property if the appraisal comes in low. You just need to have the extra cash on hand to make up the difference. If the appraisal comes in lower than the purchase price, your lender will only cover up to the appraised value since they don’t want to put themselves at too much risk.
If you are worried about waiving your appraisal, I want to share five tips to put your mind at ease:
- Work with a qualified real estate agent. Your agent will tell you how likely it is that an appraisal will come up short, and they can advise you on if waiving your contingency makes sense.
- Determine the likely difference between the appraised value and purchase price. Once you find the likely number, make sure you have enough cash to pay the difference.
- Have your lender approve you for the highest loan-to-value ratio allowed by your program. If you have room, you might be able to increase your loan to cover the appraisal gap. You may have to pay private mortgage insurance, but insurance costs are the lowest I’ve seen in a long time.
- Waive your appraisal for value issues only. This protects you from things like property safety hazards, zoning issues, and other problems not related to value.
- If you’re putting at least 10% down, have your lender try to run the loan through automated underwriting in an attempt to get an Appraisal Waiver. This allows you to purchase a property without an appraisal, putting you on par with cash buyers. It can be risky since you can start off underwritten only for things to change down the line.
If you have questions about today’s topic, please call or email me. I look forward to hearing from you!