The time has come at last! You're buying your new home in Flagstaff.  Things are going smoothly so far. The seller has accepted the offer, the contracts are signed and you've put down your deposit.  Now comes the appraisal.  What could go wrong? It turns out that the home is appraised for less than what you offered. Now the bank refuses give you the loan.  Of course you want to avoid this and you can with appraisal contingencies.

Not everyone knows about appraisal contingencies. But you should, because they can save you a lot of trouble. They are conditions that have to be met on a real estate contract before it becomes legally binding.  Most real estate contract include these conditions:

The appraisal contingency: This states that the home has to be appraised at the sale price or higher.  This will help keep the mortgage from falling through.

The finance contingency: This mandates that the deal is based on the bank granting the loan.

The inspection contingency: The home must pass inspection.

If these conditions are not met in a certain period of time, you can back away from the deal with your deposit.

How exactly does an appraisal contingency work? When a home is appraised, the bank will usually only loan the amount that the home is appraised for.  That means that if the appraisal is lower than the seller's asking price, you can walk away from the deal and get your money back if the seller refuses to lower the price.

But isn't this the same thing as a finance contingency?  Almost. If the bank agrees to a smaller loan that meets the finance contingency, then the seller can demand that you make up the difference from your own pocket.  In this case the appraisal contingency protects you, otherwise you have to come up with that extra money, or be in breech of contract and possibly lose your deposit. That's why you should have both the appraisal and finance contingency in a contract.

Does this mean you should always have contingencies in a real estate contract? That depends. Usually a seller can get offers from multiple buyers, especially in a hot market.  The easier the deal is for the seller (by not having contingencies), the better chance you have of getting the home.  But you risk that you won't get the loan you need. In the end, it's up to you, based on the market and what risks you want to take either way.