What’s the difference between an Appraisal Contingency and a Financing Contingency?

Whether you’re representing the buyer or the seller, you want the best for your client. That’s what makes you a great real estate agent. There can be a few tricky contingencies along the way that you need to be aware of in order to navigate a smooth closing. Let’s take a look at two of the most confusing ones so that you can best represent your buyer or seller.

What is an Appraisal Contingency?

Simply put, an appraisal contingency is when everyone agrees, as part of the contract, that if the house doesn’t appraise for the amount in the purchase agreement, the buyers can walk away and get their deposit money back. This is very favorable for the buyer, not so much for the seller.

 

Don’t worry if the appraisal doesn’t come back as expected- there can be further negotiations if the appraisal does not come back at the agreed upon price. These situations can include the buyer bringing more money to the closing, the buyer and seller can split the sum or the realtors may shave off a percent. But, if none of these happen, unfortunately the deal will fall apart.

Do all loans require an Appraisal Contingency?

VA, FHA and USDA loans all require an appraisal contingency. Conventional loans do not. If you are representing the buyer, you want to encourage an appraisal contingency. On the other hand, if you are representing a seller, you want to try to avoid an appraisal contingency. Since appraisals are somewhat subjective, it’s hard to know what the appraised price will be, so it’s best for a seller to not have this clause in their contract.

What is a Financing Contingency?

Financing Contingencies are for the protection of the buyer. If for some reason they are not approved for the loan on the house within the contingency date, they will  get their deposit back. For example, say they have not been approved yet and it’s three days before the closing- the lender finally comes back and says they are not approved, they will not get their deposit refunded.

 

The deadline to get their deposit back under the Financing Contingency is 7 days before closing. As a realtor it is your job to know this date and make sure they are either approved or you have asked the lender and seller’s agent for an extension. Be sure to get a written letter stating there has been an extension from the lender. This is critical to protecting your buyer’s deposit.

 

These can be two of the most confusing bumps in the road during a real estate transaction, so you want to make sure you have a clear understanding of both. If you would like to hear more real life examples, please watch our training video here.
At Dalton Wade we believe that today’s buyers and sellers need a trusted resource that can guide them through the complex world of real estate. With our extensive knowledge and commitment to providing only the best and most timely information to our clients and agents, we are your go-to source for real estate industry insight and advice. Contact us today to learn more!