What is an appraisal contingency and why is it important for buyers financing their purchase?

Mortgage lenders will only lend up to the appraised value of the property. If a home appraises below the contract price, the buyer faces a gap: they must either make up the difference in cash, renegotiate the price with the seller, or walk away from the deal. An appraisal contingency protects buyers by giving them the contractual right to exit the transaction and recover their earnest money if the appraisal comes in low and the seller refuses to lower the price. In very competitive markets, some buyers waive this contingency to strengthen their offer, but doing so carries significant financial risk.