Appraisal and Financing Contingencies When Buying From a Builder
What financing and appraisal contingencies do, how builder contracts often limit them, what happens if a new home appraises low, and how to protect your deposit.
By the iNIAZ team · Published · 2 min read
Contingencies are the conditions that let you cancel a purchase, usually with your deposit returned, if something outside your control goes wrong. In builder contracts they are often narrower than in resale contracts, so read them carefully. This is general information; have a real estate attorney review your contract.
Financing contingency
A financing contingency protects you if you cannot get the mortgage. Look for:
- The deadline to obtain a loan commitment, and whether it allows for a long build.
- Conditions, such as applying within a set time, applying with a particular lender, or accepting any loan "on the terms then available".
- What happens to deposits and upgrade payments if the contingency is used. Upgrade payments are sometimes excluded.
Some builder contracts limit the contingency unless you apply with the affiliated lender. Find out before you choose a lender, and get a pre-approval before you sign.
Appraisal contingency
An appraisal estimates the home's market value, and lenders lend on the lower of the price and the appraised value. A new home's price includes the lot premium and upgrades, and an appraiser may not value all of them at what you paid. If the appraisal comes in below the price, you generally have these options:
- pay the difference in cash, on top of your down payment;
- ask the builder to reduce the price or adjust the upgrades;
- cancel, if your contract has an appraisal contingency that allows it.
Many builder contracts do not include an appraisal contingency, so know your position before you choose expensive upgrades.
Protecting your deposit
- Know exactly when each deposit becomes non-refundable.
- Keep a pre-approval current through construction; tell your lender before any change in income, employment or debts.
- Avoid new credit, such as furniture financing, until after settlement.
- Keep copies of every application and commitment, with dates.
Rate changes during construction
If rates rise before you lock, the payment rises, and in some cases you may no longer qualify for the same loan. A longer lock, a larger down payment or a smaller upgrade budget are ways to build in room. Our offer comparison tool shows how the rate changes the monthly cost and total cost.
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General information, not legal, tax or financial advice. Confirm details that matter to your situation with a qualified professional.