As you may know, buying a home is both a competitive and complex process.

In all that paperwork you will sign, you will often find a series of contingencies. A contingency ensures that a certain condition, or set of conditions, is met in order to move forward in the process.

Contingencies protect homebuyers and sellers alike by contractually drawing out terms by a specified deadline. If the conditions are not met, the buyer or seller have recourse.

Home inspections, financing, appraisal and title contingencies are some examples.

Why is appraisal contingency needed?
A lot of work has gone into getting your financial situation in order to purchase a home. Now that you have qualified for a loan and know how much you can afford, an appraisal contingency will come in handy.

As part of the home-buying process, the home will be evaluated for its value based on the current market. A licensed professional is required to conduct the fair market value analysis of the home.

An appraisal contingency means that if the appraisal is below the agreed-upon purchase price, you are entitled to drop out of the process without any penalty of losing out on the earnest money deposit.

How does timing work?
Real estate transactions are designed to move quickly, giving each party enough time to get stuff done before the deal is final.

In an appraisal contingency, a buyer can cancel the contract if the appraised value falls under the agreed upon price. Keep in mind that the buyer and seller must first agree on how many days the buyer has to order an appraisal and make a decision.

Simply put, if one party cannot follow through as promised by the date agreed upon, a contingency will give the other party a legal out. As you can see, contingencies allow the process to move forward without delay while also shielding parties from costly losses.

Is it required?
While some contingencies might be required based on your lending arrangement, an appraisal contingency is not.

A buyer can bypass an appraisal contingency if they are confident that the agreed upon price will pass the test. If it does not, a buyer must either come up with financing to make up for the difference or be prepared to forfeit the deposit.

How is it written?
You will work with your real estate agent to decide on terms and when a contingency is needed based on a number of factors, including your own goals and current market conditions.

For example, some buyers might decide to waive a contingency if it will give them a competitive advantage. Less paperwork and faster closing can be appealing to everyone involved.

You and your real estate professional will decide when an appraisal contingency, or any contingency, is needed as a way to protect you on your home-buying journey.