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When I make an offer to buy a property, I will make sure my offer includes both an inspection contingency and an appraisal contingency. Here’s why.
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I’m currently in the market for a new house and I will hopefully be making an offer to buy a property once I’ve found a place that I love. When I do make an offer, there are two clauses I’ll absolutely insist are included in my purchase contract. Here’s what they are.
An appraisal contingency
The first clause is one making the purchase of my home conditional on a satisfactory appraisal that shows the house is worth at least as much as I’m paying for it.
I’ll be including an appraisal contingency in my offer because I’m going to get a mortgage, and mortgage lenders set a limit for how much you can borrow relative to the value of the house. The lender I use will consider the market value of the house when deciding how much I’m allowed to borrow for a mortgage.
If the appraisal were to come in too low, then my lender might raise my interest rate because it would be taking on more risk. Or it might charge me private mortgage insurance if it ends up loaning me more than 80% of what the appraiser says my home is worth after taking my down payment into account. Private mortgage insurance would provide protection for the lender against loss, but would cost me hundreds of dollars extra a month without directly benefiting me.
In a worst-case scenario, if the appraisal came in really low, I might have to put more money down or the loan might be denied entirely.
I want to avoid these outcomes by making sure the house doesn’t appraise for less than I’m paying. I also don’t want to buy a house for a lot more than an expert appraiser says it’s worth. Doing so would mean that I would likely be underwater on the home right away.
With my appraisal contingency, if the house appraises for less than I offered to pay for it, I would have the chance to walk away from the sale without losing my deposit. This could give me leverage to renegotiate the price or to simply opt out of continuing with the purchase.
An inspection contingency
My offer to buy a house will also include a clause making the purchase of the home conditional upon a satisfactory home inspection. This will enable me to bring in a professional inspector to assess the condition of the house and ensure there are no surprise repairs that would end up being necessary after my family and I move in.
By including this contingency, I can either negotiate to get repairs made (or money to make them) or have the chance to walk away from the sale if there’s something wrong with the house I didn’t know about.
These two clauses will provide vital protection for my finances. That’s why I’m going to make sure that when I make a home offer, these are a part of it.
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