How does an appraisal affect a home purchase?

First, let me explain the difference between an appraisal and an assessment, because that confuses a lot of people. The assessment is a valuation the city puts on your property for purposes of taxing your property. This value is often inaccurate and has nothing to do with your sale or purchase. An appraisal is an opinion of value reported by a licensed appraiser. An appraisal is required by lenders for most mortgage loan programs, and this appraised value is what the lender bases the loan on.

Standard offer to purchase forms in the state of Wisconsin have a checkbox that lets a buyer include or not include an appraisal contingency. The appraisal contingency gives the buyer the right to terminate the contract if an appraisal comes in low and the seller refuses to reduce the price down to the appraised value. In most cases when this contingency comes into play, the buyer and seller negotiate to some sort of agreeable middle ground.

With a cash offer, the buyer can pay whatever they are willing, and no appraisal is required. However, a cash buyer could still choose to have an appraisal contingency.

With buyers competing for homes, some are waiving appraisal contingencies or giving an allowance for the appraisal to be lower than the purchase price. If a buyer is financing a property they may need to come up with extra money if an appraisal comes in below the accepted offer price. For example: A buyer has a home under contract for $300,000 and is planning to put 20% down to avoid PMI. This makes their down payment $60,000 and their loan $240,000. Let’s say the house appraises at $290,000, now the lender will view a $232,000 loan as 80% loan to value. This means the buyer must come up with $68,000 to meet the same terms. Of course, there are lower down payment programs. However, if a buyer is depending on low down payment financing, and the appraisal is low, you can see how this could quickly mess up a buyer’s financing capabilities.

The bottom line is, buyers should understand their options when buying, and should choose if they want an appraisal contingency based on their circumstances. Sellers with multiple offers driving up the price may want to consider how an appraisal contingency could ultimately affect the sale.

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