Image this: you found your perfect home, made an offer and have come to find out the seller has accepted. What an exciting time! You completed the next step of signing the contract, as well as paid the deposit. And while you are floating on cloud nine, you are approached with some less than exiting news – you find out from the appraiser that the house is worth less than what you offered and the bank will not grant you a mortgage. We know this may seem like a huge set back, but there is something that can protect you if a situation like this arises. It is called can appraisal contingency and we are going to be covering the basics on what it is and how it can help you!

Now, you may be asking yourself what a contingency is and how does it relate to real estate. A contingency is a condition (or conditions) that must be satisfied in order for a real estate contract to become legally binding. The three most common contingencies found in real estate contracts include a finance contingency, an inspection contingency and an appraisal contingency. The deal is off and you are eligible for a refund of your deposit if these conditions are not fulfilled within a set and agreed upon time frame.

Next, lets break down how the appraisal contingency works. A licensed appraiser will typically be hired through your bank, and their job is to conclude what the fair market price of the home should be based on things such as location, similar comps in the area and the condition of the home. Now to keep things simple, lets use an example. Let’s say that the home you want to purchase is $400,000 with a $40,000 down payment and a $360,000 mortgage. Let’s also say that the home is appraised at $350,000 and since the bank will only loan you that amount, you are left $10,000 short. Enter the appraisal contingency stage left. Now if the seller does not agree to lower the price to make up the difference, you are allowed to walk away from the deal and get your deposit back, all thanks to the appraisal contingency. And while the finance contingency has the potential to cover similar risks as the appraisal contingency, it is important to have everything spelled out clearly in your contract to help ensure you are covered from all angels.