The Appraisal That Broke the Deal
Theo contracts on May 1 to buy a condo at 88 Harper Lane for $650,000. The board-form contract is contingent on his obtaining a conventional first mortgage of $520,000 within 45 days; he places a 10% deposit ($65,000) in escrow and plans to bring the remaining $130,000 at closing. On May 20 the lender's appraiser values the unit at $620,000, and the lender will lend 80% of the lower of price or appraised value. Theo's rate lock at 6.25% expires July 15; each 30-day extension costs 0.25 point. Closing is scheduled for July 10. On June 25 the seller's attorney sends a letter making time of the essence for July 10.
1. Calculate the loan Theo can actually obtain, his cash shortfall, and the cost of a lock extension.
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Loan: 80% × $620,000 (the lower of price or appraised value) = $496,000, not the $520,000 in the contract - a $24,000 gap.
Cash at closing: $650,000 − $496,000 = $154,000, against a plan of $130,000. The $65,000 deposit already escrowed counts toward that figure, so Theo must produce about $89,000 more at closing rather than the $65,000 he budgeted.
Lock extension: 0.25 point on a $496,000 loan = 0.0025 × $496,000 = $1,240 per 30 days. Extending from July 15 to mid-August costs $1,240 and does not solve the appraisal gap.
He should also price mortgage insurance or a second lien, and compare that cost against walking away and starting over in a market where rates may have moved.
2. Does the appraisal shortfall trigger the mortgage contingency clause?
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It depends on how the clause is worded, and Theo's file should be read carefully before he acts.
The standard clause conditions the contract on the purchaser obtaining a commitment for a loan in a stated principal amount - here $520,000 - and requires the purchaser to apply diligently, cooperate with the lender, and give prompt notice plus proof if the commitment is denied. A lender that will commit only $496,000 because of the appraisal is, functionally, a denial of the stated amount, which typically lets the purchaser cancel and recover the deposit.
But three traps: (a) some riders make the contingency depend on the purchaser's ability to obtain financing generally, not the exact amount, which would leave Theo short; (b) the contingency usually expires after 45 days - around June 15 - so if Theo has not given timely notice and proof, he may have waived it; (c) the purchaser must show good-faith efforts, including applying on time to a lender and supplying documents.
The clean path is a written request to the seller to reduce the price to $620,000 so the original 80% math works, with the contingency notice held in reserve.
3. What does the time-of-the-essence letter change, and what happens to Theo's $65,000 if he cannot close?
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A time-of-the-essence letter converts the closing date from a target into a hard deadline: failure to close on that date is a material default, not a minor delay. It must give clear notice and a reasonable date. Because July 10 is the date the parties already agreed to, a letter sent June 25 is likely reasonable, but it should be reviewed against the contract's notice provisions.
If Theo does not close and has no valid contingency left:
- The seller may treat the contract as breached and, under the standard liquidated-damages clause, retain the $65,000 deposit as damages.
- Depending on the rider language, the seller may instead sue for specific performance or actual damages.
Theo's protection is to preserve the contingency in writing before it lapses, or to negotiate an extension in exchange for making the deposit non-refundable. Silence is the worst option: it converts a financing problem into a forfeiture of $65,000.