Homebuyers will do just about anything in today’s housing market to stay ahead of the competition. A shortage of homes available for sale in the United States means that many markets are seeing multiple offers, properties selling quickly, and selling prices far above asking.
For many homebuyers, raising the price of an offer is still not enough to guarantee that a seller will accept their offer. Inspection contingencies are lifted, the closing time is shortened, and in some cases the assessment contingency is also lifted.
But is waiving an appraisal contingency a good idea – or even possible – if you finance your purchase with a mortgage? Here’s what you need to know about appraisal contingencies, when you might be able to forgo them, and what you need to know before you do.
What is an assessment contingency?
An appraisal contingency is a clause in a home purchase contract that gives the buyer the option to opt out of a pending sale if the appraised market value of the property is less than the agreed price.
It is often considered a risky investment to pay above the appraised value of a home, and lenders use the appraisal as a factor in determining what they are willing to provide for the purchase of a home. “A bank, when taking out a mortgage, will make a decision based on the lowest purchase price or appraised value,” says Melissa Cohn, executive mortgage banker for William Raveis Mortgage on the East Coast.
In many cases, homebuyers who finance their home purchase with a mortgage don’t have the excess cash to make up the difference. If the difference is relatively small, buyers can try to negotiate the price down with the seller to prevent the deal from falling apart. But if all else fails, the possibility of an appraisal gives the buyer an easy way out when the appraised value is too low.
Why would you forgo an assessment contingency?
In a strong seller’s market, where there are more buyers than houses available for sale, the seller has the upper hand. Buyers must carefully craft their offers to compete for a home, and homes often sell for above asking price.
By waiving an appraisal contingency, the buyer is able to appeal to the seller by eliminating the risk of the deal failing if the property is not appraised for the high sale price. “It’s not necessarily a waiver of the appraisal,” says Kevin Parker, vice president of field mortgage arrangements for the Navy Federal Credit Union in Vienna, Virginia. “You give up the possibility of negotiating if the property is not valued (for the sale price).”
In today’s market, waiving an appraisal is almost a requirement, depending on where the property is located and the number of interested buyers. “There are salespeople who are willing to give valuation contingencies, but I don’t see it often at all,” Cohn says. She adds that the winning bids, for the most part, involve all-cash “essentially no-frills” bids.
Should you waive an assessment contingency?
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When you finance the purchase of a home with a mortgage, your lender depends on the appraisal to know that they are not lending more than the value of the property.
“In my experience, I think it’s important for a buyer not to forgo an appraisal contingency,” wrote Carrie Firth, real estate agent at Coldwell Banker Realty in Pensacola, Fla., In an e- mail. “Appraisal is done for a reason. The buyer should be aware of the value of the home he is buying. He may be able to negotiate or reconsider his decision if the value does not match the purchase price. . “
Giving up the possibility of an evaluation is not the only option to make an offer more attractive. “A buyer may consider having flexibility of a closing date, covering additional costs to the seller in the transaction or shortening the inspection period,” Firth said.
If you buy the house with a mortgage and waive the possibility of an appraisal, you need to be sure that the amount you are offering matches an accurate appraisal of the property and that you have additional cash to make up the difference. if the appreciation comes back lower.
Here are some situations that may make waiving the possibility of an assessment an acceptable choice:
You know the market well and make a reasonable offer
The greatest risk to you as a buyer when you waive an appraisal contingency is the possibility that you will be forced to make up a large difference between appraised value and sale price. Take advantage of publicly available information on recent sales of similar properties in the neighborhood on sites like Zillow, realtor.com, and Redfin, and hire a real estate agent you trust to help you price. offer that you think reflects the value of the home. . This knowledge will help you make a more secure bid, but you should still have an extra cash cushion in case the valuation shows any other information.
Parker says he recently bought a house and his knowledge of the area and all the sales that have taken place there recently has made him more confident to forego the possibility of an appraisal. “You absolutely have to be very familiar with this market. In my situation, I moved three blocks into my community, ”he says.
You have enough money to guarantee you make a difference, no matter what
You may be able to cash in on other investments, have significant savings, or have a family who can lend you money in the short term, but you can waive the possibility of an appraisal in your purchase contract if you know you can make up for a difference in valuation. and cash purchase price. The evaluation will still take place, but sellers know they won’t have to worry about the outcome.
You are eligible for Fannie Mae or Freddie Mac Assessment Waiver Programs
Both Fannie Mae and Freddie Mac offer appraisal waiver programs, which make it possible to get mortgage approval without appraisal. Fannie Mae and Freddie Mac will allow certain mortgages to be supported by an in-house appraisal, rather than a third-party appraiser. However, eligibility is limited and the majority of home purchases do not warrant a waiver.
You qualify for a separate assessment waiver through your lender
Individual banks, credit unions, and other lenders may offer assessment waivers through programs other than those offered by Fannie and Freddie. Again, expect the qualifications to be quite restrictive – a very high credit score and high equity in a home you already own are possible requirements.
You are eligible for other lender programs that facilitate waivers
Lenders know how difficult the market is for buyers right now, and while they don’t want to make a bad investment, some offer programs to help buyers land a deal. Cohn says William Raveis Mortgage has a program called Raveis Purchase, which allows buyers to make a no-surprise cash offer on a home. The program is best for borrowers with high equity in their current home – the program means the lender will buy the current property and oversee its sale.
William Raveis ultimately earns between 3% and 5% of the selling price of the house, and the seller is responsible for all additional costs and brokerage fees, but the program can “help buyers who need to be able to act as if they were. a cash buyer, ”Cohn says.
When shopping for mortgages, it’s worth educating yourself about programs like this you may be eligible for to make any offer on a new home more appealing.
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