Understanding Loan and Appraisal Contingencies in the San Francisco Bay Area and California and Beyond

When you’re making an offer on a property in California (or anywhere!) It’s essential to understand loan and appraisal contingencies.

Loan Contingency

A loan contingency gives the buyer a specific period to secure financing for the property. If they can’t get a loan within this timeframe, they can back out of the contract without penalty. Waiving the loan contingency means the buyer is committing to purchase the property regardless of their financing status. This can make an offer more attractive in a competitive market, as it shows the seller that the buyer is confident in their ability to secure financing. However, it also carries risks: if the buyer fails to secure a loan, they could lose their earnest money deposit and face legal consequences.

Appraisal Contingency

An appraisal contingency allows the buyer to withdraw from the contract if the property doesn’t appraise for the agreed-upon purchase price. If the appraisal comes in lower than expected, the buyer can renegotiate with the seller or walk away from the deal. Waiving the appraisal contingency indicates to the seller that the buyer is willing to proceed with the purchase regardless of the appraised value, which can make an offer more appealing. However, this also means the buyer might end up overpaying for the property if the appraisal is lower than the purchase price. They would need to cover the difference in cash or risk losing their earnest money deposit.

In California’s competitive real estate market, especially in areas like the Bay Area, buyers often feel pressured to waive these contingencies to make their offers more attractive. In some cases, it’s almost necessary to get your offer considered.

Real-Life Example

Recently, I encountered a situation where we had no appraisal contingency but did have a loan contingency. The loan required an appraisal. The listing agent insisted that the absence of an appraisal contingency meant the appraisal was irrelevant. This is false. While the appraisal value itself wasn’t an issue due to the lack of an appraisal contingency, the loan still required an appraisal in “as is” condition to proceed. If the property had issues, the loan couldn’t close, and we’d need to negotiate with the seller.

Even without an appraisal contingency, a loan contingency means the appraisal must be satisfactory for the loan to clear. If the appraisal comes in below the property’s value, we can still move forward, but the appraisal must meet the lender’s conditions.

Final Thoughts

If you’re a realtor, it’s crucial to understand these nuances. For more information or to discuss your specific situation, you can book an appointment with me at FreshHomeLoan.com.

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I am Garrick Werdmuller, President and CEO of Fresh Home Loan Inc., Independent Mortgage Brokers that Work for the People. You can reach me here: https://freshhomeloan.com/schedule-a-meeting/

Garrick Werdmuller
President CEO
Fresh Home Loan Inc
510.282.5456 call/text
NMLS 242952

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Garrick Werdmuller

(510) 282-5456