Waiving the Appraisal Contingency: A Risky Move?

In the heat of a competitive real estate market, buyers are often pushed to make their offers as attractive as possible to a seller. This frequently involves “waiving contingencies,” or giving up certain contractual protections to sweeten the deal. Among the most significant and financially riskiest of these is the appraisal contingency. While waiving it can make your offer stand out in a bidding war, it exposes you to substantial financial danger. Before you consider checking that box, it is critical to understand exactly what you are giving up and the high-stakes gamble you are taking.

What Is an Appraisal Contingency?

An appraisal contingency is a standard clause included in most residential real estate purchase contracts. It is a provision that provides a specific protection for the home buyer. This clause states that the buyer’s obligation to purchase the property is contingent upon the home appraising for a value that is equal to or greater than the agreed-upon purchase price.

If the property is professionally appraised for less than the contract price, this contingency gives the buyer a clean exit. It allows them to terminate the contract without penalty and, crucially, receive a full refund of their earnest money deposit. It also opens the door for renegotiation, where the buyer can ask the seller to lower the price to match the appraised value.

How This Contingency Protects the Buyer and the Lender

The appraisal contingency is a dual-protection tool that serves both the buyer and their mortgage lender. For the buyer, it acts as a financial safety net, preventing them from overpaying from day one. It ensures that the price they agreed to pay is supported by an objective, third-party valuation. If an appraisal comes in low, the buyer is protected from having to bridge the “appraisal gap”—the difference between the high purchase price and the lower appraised value. For the lender, the appraisal is a non-negotiable part of their risk assessment. The house itself is the collateral for the mortgage loan. If the buyer defaults on their payments, the lender must be confident that they can sell the property to recoup their investment. A lender will only issue a loan based on the appraised value or the purchase price, whichever is lower. This contingency ensures the lender’s investment is secured by a property of sufficient value.

The Pressure to Waive in a Seller’s Market

In a balanced market, waiving an appraisal contingency is rare. However, in a competitive seller’s market, such as the one experienced in many regions over the past several years, it has become a common tactic. When a seller receives multiple offers, they are looking for the one that is not only the highest but also the most certain to close.

An offer with an appraisal contingency represents a major uncertainty for the seller. If the appraisal comes in low, the entire deal could fall apart, or they could be forced to lower their price. An offer without this contingency is a “sure thing” in their eyes. It tells the seller that the buyer is willing to accept all the risk of a low appraisal and is guaranteeing they will get their full asking price, no matter what. This is an incredibly powerful incentive for a seller to choose your offer over others.

The Enormous Financial Risks of Waiving

Waiving the appraisal contingency is one of the most significant financial risks a buyer can take in a real estate transaction. You are contractually and legally obligating yourself to purchase the home, even if the appraisal determines it is worth far less than you agreed to pay. The primary risk boils down to one simple question: Where will you get the cash to cover the difference?

You Are Responsible for the “Appraisal Gap”

If you waive the contingency and the appraisal comes in low, you are on the hook. Your lender will only loan you money based on the lower appraised value. You are now contractually required to bring extra cash to the closing table to cover that “appraisal gap.”

Let’s use a clear example. You agree to buy a home for $550,000. You waive the appraisal contingency. The lender’s appraiser determines the home is only worth $520,000. This creates an appraisal gap of $30,000. Your lender will only base their loan on the $520,000 value. You must now find an extra $30,000 in cash and bring it to closing, in addition to your planned down payment and closing costs.

The Impact on Your Down Payment and Loan-to-Value (LTV)

Many buyers mistakenly believe their gap payment will count toward their down payment. This is incorrect. The down payment is calculated as a percentage of the appraised value, not the purchase price.

Using the same example, let’s say you planned to put 20% down.

• Your planned 20% down payment on $550,000 was $110,000.
• After the low appraisal, your 20% down payment on the $520,000 value is now $104,000.
• Your total cash due at closing is $104,000 (down payment) + $30,000 (appraisal gap) = $134,000, plus all other closing costs.

Your cash-to-close requirement just jumped by $24,000. This can easily deplete a buyer’s entire savings, moving-in fund, and emergency fund all at once.

The Forced Expense of Private Mortgage Insurance (PMI)

What happens if you do not have that extra cash? You may be forced to change your loan structure. If you only have the original $110,000, you can use $30,000 for the gap, leaving you with only $80,000 for the down payment.

An $80,000 down payment on a $520,000 valuation is only 15.4%. Because your loan-to-value (LTV) ratio is now above 80%, your lender will require you to pay Private Mortgage Insurance (PMI). This adds a new, significant monthly expense to your housing payment for years, further increasing your cost of ownership.

The Nightmare Scenario: Losing Your Earnest Money

The worst-case scenario is catastrophic. What if the appraisal gap is $50,000 and you simply do not have the money? If you cannot bring the cash to close and cannot secure financing, you are in breach of contract because you waived your right to back out. The seller can terminate the deal and is almost certainly entitled to keep your earnest money deposit, which could be tens of thousands of dollars, leaving you with nothing.

Safer Alternatives to a Full, Unlimited Waiver

A full waiver is an “all or nothing” gamble that is not right for most buyers. However, you can make your offer more competitive without taking on unlimited liability. These hybrid approaches show the seller you are serious while still providing a cap on your financial risk.

Offer an Appraisal Gap Guarantee

This is the most common and effective alternative strategy. Instead of a full waiver, you include a clause in your offer that explicitly states you are willing to cover an appraisal gap, but only up to a specific amount.

For example, your offer might state, “Buyer agrees to pay up to $15,000 over the appraised value, not to exceed the purchase price.” This tells the seller you are committed and have extra cash. But it also protects you if the appraisal comes in $40,000 low. You would only be responsible for the $15,000 you promised, and you would then renegotiate or walk away.

Make a Larger Down Payment

Showing the seller you plan to make a large down payment (e.g., 30%, 40%, or more) provides a different kind of reassurance. It signals that you have substantial cash reserves. Even if the appraisal is moderately low, a lender is more likely to work with you because your LTV is already very low, making the loan less risky for them. This gives the seller confidence that your financing is robust and unlikely to fail.

Who Can Safely Consider a Full Waiver?

While risky for most, there are two types of buyers who can consider a full waiver with far less peril.

• All-Cash Buyers: If you are paying in cash, you are not borrowing money. This means there is no lender, and therefore, no mandatory appraisal. An all-cash buyer can waive the appraisal contingency with no risk to their financing because there is no financing to begin with.
• Buyers with Very Deep Cash Reserves: This is the only type of financed buyer who should ever consider it. This is a buyer who has their 20% down payment, their closing costs, their 6-month emergency fund, and a separate, substantial savings account that they are willing to use to cover a potentially massive appraisal gap. They must be financially and emotionally prepared to pay, for example, $50,000 over the home’s “official” value without it impacting their long-term financial health.

Closing Points

Waiving the appraisal contingency is not a standard part of buying a home. It is an aggressive, high-stakes tactic used to win a bidding war. In doing so, you are effectively shifting all the risk of the property’s valuation from the lender and seller directly onto your own shoulders. Before you ever consider this move, you must have an honest and detailed conversation with your mortgage lender and a financial advisor. You need to know, in no uncertain terms, what the absolute worst-case scenario is and whether you have the cold, hard cash to survive it. For the vast majority of buyers, the protection this contingency offers is far too valuable to give up.