Why you Should use an Appraisal Contingency Addendum Especially for Conventional Loans
When making an offer on a property on behalf of your buyer, how they are paying is a very important piece of the puzzle. If they are doing a VA or FHA loan you should include an FHA/VA Addendum and that addendum includes an appraisal contingency. In that case you should NOT also include an appraisal contingency addendum as it is already covered in the FHA/VA addendum and it is redundant and may even be conflicting. Your buyer is covered with the FHA/VA addendum with an appraisal contingency.
However, in the case of a conventional loan you will want to include the appraisal addendum and this is why. If the buyer is putting more than the required loan to value down, then even if the home does not appraise, their loan will not be denied and the seller can keep the buyers escrow if the buyer wants to cancel due to the appraisal if you do not have the contingency in place. It is only in the case that the buyer does not have any more cash in the bank to cover the difference that the actual loan will be denied and the lender will issue a loan denial letter thereby getting the buyer their escrow back.
Here is what Bobbie Dyer, of Dyer Mortgage has to say....
“WHY IS THE APPRAISAL CONTINGENCY IMPORTANT? WHAT HAPPENS IF THE LOAN APPROVAL LETTER IS NOT PROVIDED WITHIN 30 DAYS?
We have had the new FAR/BAR contract for a little over 3 months and have already seen issues come up over a number of items. One of the most important contract contingencies you can make to protect your buyer is the “appraisal contingency”. Typically this is worded “Home to appraise at or above sales price”. Here is an example of what can happen to you and your clients if they DO NOT have this verbiage in the contract:
1) Buyer signs contract for $400,000 home; they have a financing contingency to finance $250,000 and put $150,000 down (conventional loan).
2) Appraisal comes in lower than the sales price at $380,000. Since the buyers’ loan is still going to be approved (the loan to value is still under 80% LTV so it doesn’t add mortgage insurance which could be a deal changer) the buyer doesn’t have much chance of getting the seller to lower the price to appraised value. As far as the seller is concerned they still get their financing so the fact that the appraisal came in below sales price is irrelevant to them.
3) Buyer is approved for a $250,000 loan (the loan to value is now 65.79%), however they are now under contract to purchase a home that they know they are overpaying for by $20,000.
I always advise making the contract subject to both loan approval and appraised value at sales price or higher. Even if the loan can still be made and it is the loan to value that changed you will not have a satisfied client and they will blame someone for not protecting them from this happening.
Please be especially aware of the timelines/deadlines in the contract, especially when it relates to financing. I am already aware of a buyer that went to a lender and was told they were approved for weeks, however after 30 days there was still no loan approval letter. The buyer’s agent did not realize that the new contact only gives 3 days for action to be taken. Either the loan approval letter is obtained and sellers are notified, the buyer cancels the contract due to inability to get loan approval and they get their deposit back, or nothing happens during this three day period. In this particular case over 45 days went by and when the lender could not come through for financing the buyer was going to lose their $50K escrow deposit. The buyer immediately threatened to sue his buyer’s agent as they felt it was his responsibility to know this part of the contract and to comply with that deadline. Luckily we were able to help the buyer get financing so it closed but this is a good lesson about the importance of working with a local lender who will help you keep track of these deadlines!
As the new contract evolves and has real life experience (good or bad) we will continue to share information, provide suggestions and best practices so closing is smooth and on time.
Dyer Mortgage Group for any questions or assistance. Thank you for your business!!!
(By Bobbie Dyer, Dyer Mortgage Group)