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Low Appraisals: What To Do If Your House Is Undervalued

Andrew Dehan5-minute read

August 20, 2021

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Low Appraisals: What To Do If Your House Is Undervalued

The process of buying a home has a lot of different steps. It can feel like a juggling act, trying to maintain momentum and make sure every piece of the process comes together. Appraisals can be especially nerve-wracking given how they can affect your mortgage and whether the sale is completed or falls through.

Here we’ll talk about what to do if your home or the home you’re buying receives a low appraisal. We’ll also cover scenarios that occur when an appraisal comes in low, and provide tips for buyers and sellers to navigate this situation.

Let’s start by breaking down what a low appraisal means.

What Does A Low Appraisal Mean?

A low appraisal of a home occurs when the appraised value comes in lower than the agreed-upon offer price. The appraisal provides a snapshot of the appraiser’s opinion of the current market value based on similar closed sales in the area. When the appraised value comes in below the contract price, it limits the amount a lender will finance because they base the loan on the appraisal. 

Before finalizing a new mortgage or refinancing, a bank will order a home appraisal to determine the value of the property. The appraised value can come in higher or lower than the home’s price. It’s when it comes in low that it can become a problem.

The mortgage company will not lend above the appraisal price in a home sale. For the sale to go through, the buyer will need to either negotiate with the seller to take less for the home or make up the difference – also known as “the appraisal gap.”

In a refinance situation, a low appraisal can mean the homeowner may not be able to take out as much equity.

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Was My Home Appraisal Undervalued?

When a low appraisal occurs, it’s important to ask what information was used to determine that value. It’s important to confirm that the most recent information on comparable properties was used. Especially in competitive markets, since homes can regularly sell over asking price. Keep in mind that the appraiser can only use sales that have closed, and that they should choose comparables that are as similar in gross living area, bedroom/bathroom count, and location as possible. 

An appraisal could also come back low if an appraiser leaves out information on significant home improvements or cannot find adequate comparables in the area.

How Often Do Home Appraisals Come In Low?

Low appraisals have become more common with increasingly competitive markets. There are many factors that can hurt a home appraisal, such as the home being in a specific neighborhood, school district and varying market conditions.

Know that, if your appraisal comes back low and you think it’s inaccurate, there are ways you can appeal.

Low Appraisal Scenarios

If you’re refinancing and received a low appraisal, you might appeal it, but be prepared to have data to illustrate that it was undervalued compared to other homes in the area.

When you’re buying a home, the stakes are higher. Chances are you’ve gotten used to the idea of moving into that home. If you did not include an appraisal contingency with your offer, your earnest money could be on the line if the sale falls through.

Here are a couple scenarios that can occur during the appraisal process when buying or selling your home. By no means are these extensive but they are a great jumping-off point for further conversation around low appraisals.

What Happens If The Appraisal Is Lower Than The Offer/Purchase Price?

If an appraisal comes in lower than the purchase price when a property is being bought, it can be bad news for the buyer and the seller. When an appraisal comes in low, the buyer’s mortgage lender will not lend more than the appraised value. Part of this is because this is a situation where a buyer could have an underwater mortgage.

Another part of why lenders do not exceed the appraised value has to do with loan guidelines. Lenders use the appraised value to calculate your loan-to-value (LTV) ratio. Here’s an example of how this can play out:

Say you’re using a conventional loan to pay for a $200,000 house. The maximum LTV for this loan is 97%, or $194,000. If the home appraises for only $190,000, you need to find a way to make up the $10,000 difference.

You have two options: Pay the difference in price out of pocket or negotiate with the seller.

How To Negotiate With A Seller After Low Appraisal

Sellers don’t want the sale of their home to fall through, and they know that if a home appraises low it will be difficult to get the price they’re asking. On top of that, if there’s an appraisal contingency in the purchase agreement, a buyer can back out of the sale no questions asked without losing their earnest money deposit.

In this situation, negotiating is the best option for the buyer and seller. Here are a couple things you can do to start negotiations:

  • Check with your lender to see if a second appraisal can be requested. Note: You’ll need to submit additional information to show the first appraisal was deficient.
  • Ask the seller what they can do for you
  • Talk to your real estate agent
  • Do your research and know your leverage

Tips For A Low Appraisal 

While low appraisals may be uncommon, they do occur. It’s best to be prepared for the possibility of this situation so you’re not caught off guard. Whether you’re selling or buying, be prepared. Review these tips so you know what to do to keep the process moving and not have the transaction fall through.

Low Appraisal Tips For The Seller

The work you can do as a seller to avoid a low appraisal is all about being prepared. Make it easy for the appraiser and be engaged in the process.

Here are some tips on how to start the process on the right foot:

  • Prepare the home inside and out
  • Be prepared to answer any questions the appraiser may have
  • Have a list of upgrades and dates of completion available

Low Appraisal Tips For The Buyer 

If you’ve signed a purchase agreement and put in your good faith deposit, you’re already invested in the property. It can really wreck your plans if the appraisal comes in low and you don’t have a back-up plan in place. Being ready for this possibility will make the process smoother should a low appraisal scenario occur.

Here are some tips on how to deal with a low appraisal:

  • Be thoughtful about the original bid put in on a home
  • Review your copy of the appraisal
  • Ask lender if it’s possible to order a second appraisal
  • Negotiate the price
  • Bring cash to the closing table to make up the difference
  • Consider an all-cash offer 

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The Bottom Line: Receiving A Low Appraisal Can Happen To Anyone

When a home’s value is appraised below the agreed purchase price, there can be problems. Fortunately, this isn’t uncharted territory. Low appraisals happen, even if they’re atypical. There are steps you can take, especially as a seller or homeowner, to avoid your home being appraised low. These include adequately preparing the home for appraisal and supplying your lender and appraiser with helpful, accurate information.

As a buyer, if the appraisal comes in low your options are to appeal it, request a second appraisal if you suspect there are flaws in the first one, negotiate the purchase price and/or bring more cash to the table.

Have more questions around appraisals? You should talk to your real estate agent about the process. Chances are, they’ve already experienced low appraisal scenarios and will be able to give you quality advice.

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.