What Should You Do If The Home Appraisal Value Is Lower Than The Offer Price?

Maybe you’re just entering the housing market, and reading ahead to get an overview of the entire process. Or maybe, and unfortunately, you may have just learned that there is a substantial appraisal gap and your purchase of a home is now in jeopardy.

Either way, the appraisal process is one of the last hurdles you’ll encounter on your way to closing, whether you're buying a new home or refinancing your home loan. Most home buyers don’t think about the home appraisal much until it’s upon them. Or until there’s a problem.

We’ll help you understand the impact of a low appraisal and discuss your options 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.

A “house appraises low” if the value assessed by the home appraiser is lower than the purchase  price agreed to between the buyer and seller. 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.  A low appraisal might delay or even derail your closing.

While this sounds scary, it’s important to keep in mind that your real estate agent can help you manage the appraisal process and keep your sale or purchase on track to closing.

Before finalizing a new mortgage or refinancing, a bank will order a home appraisal to determine the value of the property. An appraiser then evaluates the property and looks at comparable sales in your area. Then, the appraiser prepares a report which contains their expert view on 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. Mortgage lenders will not lend above the appraisal price in a home sale. They want to be sure in the case of a default that the home can be sold for enough to allow them to recoup their loss on the loan.

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. This is especially true 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.

According to Fannie Mae, appraisals come in lower than expected in less than 8% of home sale transactions. That means that 92% of the time, the appraisal process moves forward without causing any problems.

Your real estate agent can help you avoid appraisal problems by having comps at the ready to show the appraiser preparing your appraisal report.

Low appraisals can be a problem in neighborhoods with homes that are rapidly appreciating. That’s because homes in overheated real estate markets have appreciated in value so rapidly that comps might not reflect the prices sellers are currently being offered.

Another common appraisal problem occurs in rural areas, where homes and properties can’t easily be compared to one another.

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.

What Happens If The Appraisal Is Lower Than The 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.

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’ll need to find a way to make up the $10,000 difference.

Generally speaking, this scenario happens less often than when a lender is assessing the home for a purchase. In the refinance process, the lender is more concerned with how much equity you have in the home and your record of making monthly mortgage payments on time and in full.

There are a few possible scenarios in this situation.

Parties Can Request A Second Look

At the onset of the COVID-19 pandemic, lenders became more accepting of desktop or drive-by appraisals. These types of appraisals rely on filed documents reviewed online and it can be easy to miss improvements and upgrades inside the home, like kitchen renovations or bathroom upgrades.

Your real estate agent will take the lead in pushing back on a low appraisal. If they find a discrepancy in the report , they can ask for a correction/revision. Some common problems that can lower an appraised value include miscalculation of square footage or failure to include out buildings or recent renovations.

Let’s consider a commonly overlooked feature: a fully renovated basement. Your agent might provide the owner’s building permits and plans as well as comparable sales figures that include fully renovated basements to challenge the appraised value. The appraiser might amend their appraisal, or the agent might submit their evidence to an independent appraiser. 

In general, by submitting proof of the oversight and working together with the lender, your agent should be able to get the closing back on track. Your closing might be delayed, however, and you may have to pay for an additional appraisal that is based on the additional information submitted by your agent. 

However, in the absence of well-substantiated claims of oversight or mistake, most lenders, including Rocket Mortgage, would be unlikely to agree to a second request for an appraisal.

Buyer Makes Up The Difference In Cash

In a seller’s market, where sellers hold more negotiating power, they’ll have little incentive to lower their price in response to a low appraisal. In all likelihood, buyers will have to make up the difference between the loan amount the lender is willing to offer and the purchase price.

Buyer And Seller Renegotiate The Purchase Price

If the purchase agreement contains an appraisal contingency, the buyer is protected in the case of a low appraisal. If the buyer can’t get the seller to adjust the price or come up with the difference in cash, they can walk away from the sale with their earnest money deposit returned to them.

Buyer Exercises Their Appraisal Contingency

If the purchase agreement contains an appraisal contingency, the buyer is protected in the case of a low appraisal. If the buyer can’t get the seller to adjust the price or come up with the difference in cash, they can walk away from the sale with their earnest money deposit returned to them.

Buyer Walks Away From The Sale

If the buyer can’t come up with more cash, the seller won’t move on the price and the lender won’t budge, the buyer may have no choice but to walk away from the sale. If the purchase agreement doesn’t contain an appraisal contingency, they will, unfortunately, lose their earnest money deposit.

If you’re in the position of having to walk away, take solace in the fact that you may have dodged a bullet. If the house isn’t worth what you’re willing to pay, you could end up underwater on your mortgage. That would mean you’d be unable to sell without absorbing the loss of the difference between what the home sells for and what the balance owed on the mortgage loan. 

Similarly, you’d have a hard time refinancing your home because of your too-high LTV ratio.

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.
• Approach the seller about reducing the asking price.
• Talk to your real estate agent.
• Do your research and know your leverage.

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 home appraisal tips so you know what to do to keep the process moving and not have the transaction fall through.

Tips For Sellers

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.

Tips For Buyers

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 your 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.

When you’re in the process of buying a home, there are a large number of moving pieces. One of these pieces is the home appraisal. Low appraisals happen, and can cause delays. But in most cases, working with your real estate agent and your lender, you can resolve these problems and move on to closing.

If you do have to walk away and start all over again, we’re here to help the second time around. Apply online now and get your approval or refinance started.