Appraisal Gaps: What to Do if the Appraisal is Lower than the Offer?

FHA home loans are a great mortgage option, offering borrowers an affordable opportunity to fulfill their dreams of homeownership. However, every home purchased with an FHA loan must undergo an appraisal and meet the program’s minimum property standards to ensure it is in safe and adequate condition.

The appraisal process can be stressful, even for seasoned homebuyers, since a low appraisal can result in significant timeline delays. That is why we have compiled what you need to know about FHA appraisals and what steps you can take if you receive one that is lower than the offer.

What is an appraisal gap?

An appraisal gap refers to the difference in price between the fair market value of a home determined by the appraiser and the purchase price you have agreed on with the seller.

Next steps when an FHA appraisal comes in low

While the appraisal itself is a straightforward process that takes place in a couple of hours, it will likely take a few days to receive the appraiser’s final report. In cases where the appraised value of the home is less than the agreed purchase price, your lender may decide they are not willing to provide the full amount.

Buyers who find themselves in this situation still have options at their disposal.

1. Negotiate with the seller: Once you have the appraisal report in hand, you can go back to the seller to renegotiate the purchase price

2. Fund the remaining amount yourself: Most lenders will agree to provide a loan amount that equals the FHA appraised value, and you can pay the rest of the cost out of pocket

3. Keep house-hunting: If you do not have enough funds or cannot negotiate a lower purchase price, you may have to walk away from the deal entirely

As a buyer, it is important to be prepared for any scenario. Discuss negotiation strategies with your real estate agent and be sure to include an appraisal contingency in your purchase agreement. That way, if you find yourself with a low appraisal, you will have alternative options ready.

Is an appraisal gap allowed with an FHA loan?

Yes, appraisal gaps are allowed with FHA loans. However, borrowers are required to cover the difference themselves to keep their home purchase on track or avoid losing money.

What happens if you cannot cover the gap?

If you do not have the funds to cover an appraisal gap, you can try negotiating with the seller to lower their asking price. However, this can be difficult in a seller’s market where there are other buyers who may be willing to pay the full purchase price.

If the seller is not willing to negotiate a new price, then you can consider increasing the size of your down payment to cover the gap. Though this will increase your upfront costs, it is a straightforward solution that will get the deal back on track.

Another strategy used by homebuyers to cover an appraisal gap is to ask family or friends for assistance in the form of gift money. Although there is no limit on how much a person can gift to you, there may be tax implications depending on the amount gifted. You must also provide a gift letter, and most lenders require proof that the money has been in your account for at least three months.

You also have the option of walking away from the deal. While it may not be ideal, sometimes canceling a deal can work out for the best. If the home appraises at a lower value than the asking price, it means that it is not worth what you are planning to spend, and you may be responsible for repair costs and renovations later on. Having the ability to walk away can save you thousands of dollars.

Do you get earnest money back if your appraisal is low?

A big fear for homebuyers is the potential loss of their earnest money deposit in the event that the appraisal is low, and the seller will not lower the home’s price to match.

The good news is you can get earnest money back, even if you have to walk away from a purchase contract. The FHA amendatory clause, or escape clause, is a required disclosure signed by the borrower, seller, and real estate agents involved in the FHA home purchase. It enables you to cancel the deal and receive a full refund of your earnest money without any sort of penalty in the event of a low appraisal.

How buyers can protect themselves

It is important to remember that the purpose of an FHA appraisal is ultimately to protect you from a bad deal. Here are a few ways you can set yourself up for success before, during, and after an FHA home appraisal:

• Choose a lender with extensive experience funding FHA loans

• Review the FHA’s minimum property standards before you start house-hunting

• Attend the appraisal in person (just be sure to stay out of your appraiser’s way)

• Keep a list of other homes you are interested in, so you are ready to walk away from a deal

• Work with a real estate agent who has experience dealing with home puchases using FHA loans

As long as you do your research and understand how FHA loans and appraisals work, you will be well on your way to a successful homebuying journey. You can also reach out to a trusted FHA-approved lender to discuss the FHA lending process in-depth.