What Happens if the Appraisal is Lower than the Offer?

Picture this: You have secured pre-approval from your mortgage lender, found the perfect home, and put in an offer that the seller has accepted! Now that you can apply for an official home loan approval, you may think you are well on your way to closing day. However, there is one last hurdle every homebuyer must face first: the appraisal.

 It is important, though, that you understand the potential impact of a low appraisal on your homebuying timeline. That is why we are covering what you need to know for cases where a home loan is more than a home’s appraised value so you can navigate the situation with confidence.

What is a home appraisal?

In order to receive your mortgage loan, an appraisal must be conducted to confirm the home’s value. Though it is the buyer’s responsibility to pay for it, your lender will be in charge of hiring a licensed appraiser to evaluate the property and provide a final report of their findings. The appraiser assesses factors such as location, size, age, renovations, functionality of main systems, and compare your home against real estate market trends and sale prices of comparable homes.

What does a low appraisal mean for homebuyers?

When a home appraises low, it means the appraiser has determined that the purchase price agreed upon by the buyer and seller is higher than the actual value of the home. This outcome can keep you from closing on your loan because lenders will not finance a home loan for more than the property’s appraised value.

Factors that may cause a low appraisal

There are a number of causes for a low home appraisal, including:

• Current real estate market trends

• Poor curb appeal

• Undesirable location

• Deferred or poor property maintenance

• Dated finishes and additions

• Overly personalized renovations

• Comparable properties (for example, an identical home with updated siding, paint, roofing, and more)

Do not be alarmed, though. Keep in mind that your real estate agent will be by your side to help you manage the appraisal process and do what they can to keep your home purchase on track.

What happens if the appraisal is lower than your offer?

So, what exactly can you expect should the appraisal value come back lower than the agreed upon purchase price? Home loan guidelines will prevent your lender from approving a mortgage loan for more than the appraised value of the home.

This is due to home loan guidelines. Lenders use the appraised value to calculate a borrower’s loan-to-value (LTV) ratio. Let us say you are using a conventional loan for your purchase, which has a maximum LTV ratio of 97%. The seller has agreed to price the home at $300,000, but the appraiser reports that the home’s value is only $285,000. That means you will only be approved for a mortgage amount that equals the appraised value total and you need to make up the $15,000 difference out of your own pocket.

If you are able to provide a 20% down payment, you will be in the clear, as it will bring your LTV ratio down to 84%. However, if you were initially planning on providing a down payment to cover the 3% needed for an LTV ratio of 97%, your home purchase may be in danger of falling through.

What should you do if you get a low appraisal?

It is important to refrain from panicking if the home you are buying comes back with a low appraisal. There are actions buyers can take, such as:

Requesting a second look or appraisal

With the help of an experienced real estate agent, you have the option to push back on a low appraisal. Your agent can review the report and request corrections or revisions if they find any discrepancies, including:

• Outdated information used by the appraiser. This is especially common in competitive markets in which comparable houses regularly sell over the asking price, so it is imperative they have the most up-to-date market statistics.

• Recent home improvements are not included. Whether the appraiser leaves this information out or cannot find appropriate comparisons in the area, it may result in a less accurate appraisal.

• Local homes are appreciating. Especially in recent years, properties are appreciating quickly, and many comps may not be a true reflection of the prices currently offered by sellers.

Other factors such as miscalculated square footage can also be cause for a low appraised value. Remember, licensed appraisers are human, and oversights happen. Working closely with your lender and real estate agent to correct any potential mistakes will go a long way in helping you get your home purchase back on track. However, be prepared for delays as the report is reviewed and another appraisal is scheduled.

Making up the difference in cash

Barring any appraisal mistakes, buyers may have to make up the difference between appraisal value and purchase price out of pocket. This is especially true in a seller’s market, where sellers hold more negotiating power. They will have little incentive to lower their asking price, regardless of the appraisal results.

Renegotiating the purchase price with the seller

However, in a buyer’s market, you will have the power to negotiate with motivated sellers who are eager to get the home off the market. They may be more incentivized to lower the purchase price to ensure the sale goes through or decide to cover the costs of any needed renovations or repairs prior to closing.

Walking away from the sale

There are cases, though, where you may need to be ready to walk away from a sale if the seller is not willing to negotiate and you cannot provide cash to make up the difference. It may be disappointing, but take comfort in the fact that you may have dodged a bullet and avoided the cost of future renovations. You do not want to end up paying more than you are willing and acquiring a home that will ultimately sell for less than the balance you owe on the mortgage.

This scenario is why it is vital to include an appraisal contingency in your purchase contract, in order to avoid losing your earnest money deposit.

Using your appraisal contingency

 There is a great tool homebuyers can use to lessen their stress during this process: an appraisal contingency. This is a condition that is built into real estate contracts to provide the buyer the right to walk away from a transaction in cases where the appraised value is low. The added protection ensures that you can keep your money deposit, so you do not incur any losses from a deal gone awry.

Although it may make your offer a little less appealing to sellers in a competitive market, it is always best to consider your options and discuss a strategy with your real estate agent prior to submitting an offer.

Remember, you have options!

It can be discouraging to receive a low appraisal value on a home you have fallen in love with, but it does happen, so it is best to be prepared. As long as you are working with a reliable real estate agent and mortgage lender, these issues can be resolved so you are able to get your home purchase back on track to closing day.

Regardless of delays or needing to move on finding a different home, there are steps you can take to protect your interests and get the best deal possible.