4 Options if Your Home Appraisal Comes in Low

Low appraisals are not uncommon in the current real estate market. With rising home prices, it is possible for the appraised value to come in lower than the amount offered by the buyer. This situation can pose challenges and financial implications.

When there is a significant difference between the purchase price and the appraised value of a home, it can create difficulties in obtaining financing. Lenders rely on the appraised value to assess the risk associated with the loan and determine the maximum amount they are willing to lend. If the appraised value comes in lower than expected, lenders may become cautious and may be hesitant to provide the full loan amount.

Loan-to-Value Ratio: How a Low Appraisal Affects Your Mortgage Options

Lenders have guidelines and loan-to-value ratios that they adhere to when granting mortgage loans. These ratios determine the maximum percentage of the appraised value they are willing to lend. For example, if a lender has a loan-to-value ratio of 80%, they will typically lend up to 80% of the appraised value of the property.

Percentage of Appraisals At, Below or Above Contract Price for Single-Family Homes in the United States, 2013-2021

When the appraised value is lower than the purchase price, it can result in a higher loan-to-value ratio. Lenders may be less willing to provide a loan if the ratio exceeds their predefined limits. This could lead to several scenarios:

1. Higher down payment: To compensate for the lower appraised value, lenders may require you to make a larger down payment. For example, if the lender’s maximum loan-to-value ratio is 80% and the appraised value is $200,000, but the purchase price is $250,000, you may need to pay a higher down payment to bring the loan-to-value ratio within the lender’s limits.

2. Loan denial or adjustment: In some cases, a significantly low appraisal value may lead to the lender denying the loan application altogether. If the lender believes the risk is too high due to the discrepancy between the purchase price and appraised value, they may choose not to proceed with the financing. Alternatively, they may adjust the loan amount to align with the appraised value, leaving you to cover the difference.

3. Private Mortgage Insurance (PMI): If the appraised value is low and the loan-to-value ratio exceeds a certain threshold, you may be required to pay for Private Mortgage Insurance. PMI is an additional cost that protects the lender in case of default. It is typically required for loans with a loan-to-value ratio above 80%. This additional expense can increase your monthly mortgage payments.

It is important to keep in mind that lenders have their own policies and criteria when evaluating appraisals. They want to ensure that the loan amount is justified by the value of the property. A significant discrepancy between the purchase price and the appraised value could raise concerns about the property’s true worth and the potential risk involved.

When your home appraisal comes in low: 4 possible options

1. You can make up the difference in cash.

By paying the gap between your offer and the appraised value out of pocket, you can bridge the shortfall and proceed with the purchase. This option is particularly viable if the discrepancy is relatively small or if you have substantial savings set aside.

If you find yourself in a situation where you have limited cash reserves, there are still alternative financing options to explore. You can discuss the possibility of changing your loan structure with your loan officer. For example, if you initially planned on securing a conventional loan and putting down 20% of the purchase price, you could consider switching to an FHA loan, which requires a down payment as low as 3.5%. By making this adjustment, you can free up some cash that can be allocated towards covering the appraisal gap.

Assessing the Effects of Adjusting Your Loan Structure

It’s important to note that changing your loan type and down payment amount should be carefully evaluated in consultation with your loan officer. While it may provide immediate cash relief, it’s crucial to consider the long-term financial implications of adjusting your loan terms. This includes factors such as potentially higher mortgage insurance premiums or a longer loan repayment period, which could affect your overall costs and financial flexibility.

By exploring this option, you can potentially find a solution that allows you to bridge the appraisal gap while managing your cash flow effectively. It’s advisable to have open and transparent communication with your loan officer to fully understand the implications of any financing changes and to ensure that they align with your financial goals and circumstances.

2. You can renegotiate with the seller.

You can also go back to the seller and renegotiate your deal. This might mean asking them to reduce the sale price — ideally down to the appraised value so you don’t have to pay any extra cash. Or, you could ask if they’ll split the difference or accept a slightly reduced price.

Keep in mind that this won’t always be successful. If you were up against dozens of other buyers, the seller probably won’t reduce their price much — if at all. (They may even have backup bids on the table already).

3. You can refute the appraisal (or get another one).

You can always refute the appraisal and try to prove the home’s worth more than your appraiser said. This requires pulling comparable sales data — namely, the recent sale prices of similar homes in the area. If those numbers support a higher value, there’s a chance your appraiser could update their report.

By presenting evidence and data that support a higher value for the home, you can attempt to convince the appraiser to update their report. This process involves gathering comparable sales data, which includes recent sale prices of similar homes in the area. If the data shows a consistent trend of higher values, it can serve as compelling evidence to support your case.

While there is a chance that the appraiser will revise their report based on the new data, it is important to note that success is not guaranteed.

Ordering Another Appraisal

Alternatively, you can opt to order another appraisal from a different appraiser. This approach provides a fresh perspective and can potentially result in a higher valuation. However, it’s essential to consider that ordering a new appraisal comes at a cost. Appraisal fees typically range from $300 to $500, depending on the size and complexity of the home. Before deciding on this option, it is important to weigh the potential benefits against the additional expense incurred.

Both disputing an appraisal and ordering a new appraisal require careful consideration. It is advisable to consult with a real estate professional or seek guidance from an experienced appraiser to assess the likelihood of success and determine the most cost-effective course of action. Keep in mind that challenging or obtaining a new appraisal may introduce delays in the homebuying process, so it is crucial to consider the timeline and any potential impact on your purchase agreement.

4. You can back out of the deal.

If none of the previously mentioned strategies prove effective in addressing the low home appraisal, you still have the option to back out of the deal. However, it’s important to note that exercising this option is contingent upon having an appraisal contingency included in your sale contract.

An appraisal contingency is a clause in the contract that allows the buyer to withdraw from the transaction if the property does not appraise for the specified amount. This contingency provides protection for the buyer in case of a low appraisal. Without an appraisal contingency in place, backing out of the deal would result in forfeiting any earnest money or other deposits that you may have already made.

It’s crucial to carefully review your sale contract to determine if an appraisal contingency exists and understand its terms and conditions. This contingency typically sets forth the specific conditions under which you can terminate the contract based on the appraisal results. These conditions might include a timeframe within which you must notify the seller of your intent to terminate the contract and provide supporting documentation regarding the low appraisal.

Before deciding to exercise the appraisal contingency and back out of the deal, it’s advisable to consult with a real estate attorney or agent to fully understand the legal implications and potential consequences. Consider factors such as the current state of the real estate market, any potential financial losses, and the impact on your future homebuying plans.

Ask for help if your home appraisal comes in low

If your appraisal comes in low, always consult your real estate agent and loan officer for guidance. They can help you determine the best (and most affordable) path forward for your home purchase.