Do I Need Contingencies? Financing And Appraisal Contingencies.

Financing and appraisal contingencies are important aspects of the home buying process that protect the buyer from potential financial losses. They are typically included in the purchase contract and allow the buyer to back out of the sale if certain conditions are not met.

A financing contingency is a clause in the purchase contract that states that the sale of the home is contingent on the buyer obtaining financing. This means that if the buyer is unable to secure financing, they have the option to cancel the contract and receive their deposit back. This is particularly important for buyers who are obtaining a mortgage, as they may be denied financing due to factors such as poor credit or insufficient income.

An appraisal contingency is a clause in the purchase contract that states that the sale of the home is contingent on the property being appraised at or above the purchase price. This is to protect the buyer from overpaying for a property. Appraisals are usually ordered by the lender and performed by a licensed appraiser, who will estimate the value of the property based on factors such as location, size, condition, and recent sales of similar properties. If the appraisal comes back lower than the purchase price, the buyer may have the option to renegotiate the price, or to cancel the contract and receive their deposit back.

It's important to note that, if the buyer does decide to cancel the contract due to a failed financing or appraisal contingency, the deposit is usually returned. However, the buyer's deposit is usually non-refundable if the buyer backs out of the contract for other reasons.

In conclusion, financing and appraisal contingencies are important protections for buyers in the home buying process. A financing contingency protects the buyer from the risk of being unable to secure financing, while an appraisal contingency protects the buyer from overpaying for a property. These contingencies are usually included in the purchase contract and can be a safety net for buyers. It's important to understand how they work and what happens when contingencies are not met, so that the buyers can make a well-informed decision when buying a property.