Risks and Benefits of Waiving the Appraisal Contingency

When a rush of buyers submits competing bids on a home, you may be tempted to waive the appraisal contingency to make your offer on a house more attractive to the seller. While this can help your offer stand out, there can be expensive drawbacks to waiving the appraisal contingency. Here’s what you need to know about the risks and benefits of waiving the appraisal contingency.

What Is an Appraisal Contingency?

A contingency in real estate is a condition written into the purchase and sale agreement that must be met for the sale of a home to close.

An appraisal contingency requires a home appraisal from an independent third party that meets a minimum value — usually the offer price. While this helps the buyer know they’re paying a fair price, confirming the value of the home is mainly done to assure the lender that it isn’t lending more than the home is worth.

Lenders won’t approve a loan for more money than a home is worth because they will lose money if they need to foreclose on the home and sell it. If an appraisal comes in low, the buyer may be unable to borrow enough money to buy the home.

An appraisal contingency allows the buyer to back out of the deal and take back any earnest money if the appraisal comes in low. That ability to back out also gives the buyer some leverage to renegotiate a lower selling price if the buyer wants to avoid canceling the deal.

Without an appraisal contingency, the buyer still would be obligated to buy the home. That means the buyer would need to come up with a larger down payment to cover the difference between the appraised amount and the sale price. Failing that, the buyer would forfeit their earnest money, and the seller could sue for breach of contract.

Why You Might Waive the Appraisal Contingency

Waiving the appraisal contingency is common in hot real estate markets where buyers face increased competition. A December 2023 survey from the National Association of Realtors found that 15% of buyers waived appraisal contingencies in their real estate purchase offers — a number that has been steady over the past couple of years.

As a buyer, waiving any contingency sweetens your offer. The fewer conditions you put on the sale, the more confidence the seller can have that the deal will be completed.

Many buyers waive the appraisal contingency in hot markets because they rarely are needed when prices are rising. If buyers are confident that a home will appraise for at least as much as they’re offering, they may decide that an appraisal contingency is unnecessary.

Another reason to consider waiving the appraisal contingency is that a financing contingency will protect you if you’re unable to get a mortgage. If your lender denies your mortgage application, which may happen if the home appraises too low, that can give you the chance to back out of the deal.

Waiving the appraisal contingency is easiest if you’re paying cash for a home because you’re not relying on a lender to approve you for a mortgage.

Buyers using conventional loans may be able to waive the appraisal contingency if they have a strong credit score and are making a down payment of at least 20%. In those cases, the automatic underwriting process will incorporate data from comparable sales to determine the home’s value in place of an in-person appraisal. People buying a home with a loan backed by the Federal Housing Administration or Veterans Affairs cannot waive the appraisal contingency.

Risks of Waiving the Appraisal Contingency

Waiving the appraisal contingency can be risky if you’re uncertain that the home is worth what you’re offering for it.

It also risks any earnest money deposit you pay when your offer is accepted. Typical earnest money deposits range from 1% to 3% of the home’s value. For example, if you bought a home for the median price in the United States — $417,700 as of the fourth quarter of 2023 — you’d offer between $4,177 and $12,531 in earnest money. If you’re making a 5% down payment, you’d need a mortgage for $396,815. If the appraisal comes back at $380,000, your lender won’t approve the loan you need to buy the home.

If you lack the cash to make up the difference and the lender won’t reduce the price, an appraisal contingency would allow you to cancel the sale and get back your earnest money. With no appraisal contingency, you’d still have a legal obligation to buy the home. Backing out of the deal means you’ll at least forfeit your earnest money, and you could be liable for breach of contract.

“Unless a buyer is paying all cash or making a very sizable down payment, having an appraisal contingency is strongly advised,” says Ken Sisson, a Los Angeles-based Realtor.

Benefits of Waiving the Appraisal Contingency

In a hot market, waiving the appraisal contingency can help your offer stand out from the competition. If you’re paying in cash or have enough money to cover the gap between the appraised value and the purchase price, waiving the appraisal contingency could encourage the seller to accept your offer.

What Can You Do If an Appraisal Comes In Lower Than Expected?

If the home appraisal is lower than the offer, there are a few things you can do.

First, you have the option to walk away from the deal. If you waived your appraisal contingency, that means giving up your earnest money, but it may be preferable to forfeit that cash than to overpay for a home.

Another option, especially if the appraisal is only slightly lower than you need it to be, is to ask for a second appraisal. However, unless you can show a clear mistake that could have affected the first appraisal, many lenders won’t agree to or accept a second appraisal.

Some common reasons that lenders grant you a second appraisal include:

• Miscalculation of square footage.
• Incorrect number of rooms.
• Failure to include recent renovations or upgrades.
• Failure to include a garage or shed.

You also can ask the seller to renegotiate the price of the home. This is easier to do if you have an appraisal contingency.

Finally, you can increase your down payment and reduce the amount you have to borrow to buy the home.

When To Consider Waiving the Appraisal Contingency

Here are some scenarios where a buyer might waive the appraisal contingency:

• The market is hot, and you’re facing a lot of competition.
• You believe the offer you’re making matches the value of the home.
• You have enough cash to make up the gap between the appraised value and the purchase price.
• You qualify for an appraisal waiver from your lender, Fannie Mae, or Freddie Mac.

Pros and Cons of Waiving the Appraisal Contingency

There are some benefits to waiving the appraisal contingency, but it’s also important to consider the drawbacks.

Pros

• Your offer is more attractive. “In a competitive housing market, where multiple offers are being made on a property, a seller may prefer an offer that waives some or all contingencies,” says Matthew Martinez, CEO of Diamond Real Estate Group in Santa Rosa, California.
• You can save money if you’re paying cash. If you are buying with cash and don’t need an appraisal from a lender, waiving the appraisal saves you money.

Cons

• You may pay more than the home is worth. “The risk of waiving the appraisal contingency in a real estate contract is that the buyer may end up paying more for the property than it is worth,” Martinez says. You’d start out owning the property with negative home equity, meaning it would be years before you could get a home equity loan, home equity line of credit, or cash-out refinance. You also would have to pay for private mortgage insurance.
• You would lose your earnest money if you backed out. Without the appraisal contingency, you forfeit any earnest money you’ve provided if you back out of the deal.
• You may face legal action. If you’re unable to close the deal, the seller could sue you for breach of contract.

Appraisal Contingency FAQ

Here are answers to some frequently asked questions about waiving the appraisal contingency.

The Bottom Line on Waiving Appraisal Contingencies

Appraisal contingencies protect buyers from paying more than a home is worth. They’re very common, but some people choose to waive them in competitive real estate markets to sweeten their offers. If you feel that waiving the appraisal contingency is the right move for you, consider the drawbacks and make sure you have a plan for dealing with them.

Rory Arnold contributed to the reporting of this article.