What happens if the appraisal is lower than the offer?

If you’re buying or selling a home, the appraisal process is one of the last hurdles you’ll encounter on your way to closing.

If the appraisal comes back low, it can delay or hinder your ability to move forward with the transaction. This is because mortgage lenders won’t lend more money than the appraised value, forcing the buyer to take action of some kind. It’s important to go into the appraisal process aware of your options if this happens.

What does a low appraisal mean?

A house appraisal “came in low” if the value assessed by the home appraiser is lower than the purchase price the buyer and seller agreed on.

The home appraisal provides a snapshot of the home’s current value based on characteristics of the home and prices that similar homes nearby have recently sold for.

If your appraiser assigns a home value lower than the offer price, your real estate agent can provide valuable guidance on the most appropriate steps to take next.

How often do home appraisals come in low?

If you’re wondering how often home appraisals come in lower than a home’s asking price, you’ll likely be happy to find out that it’s fairly rare. On average, only 10% of home appraisals fetch a lower number than the asking price.

What happens if the appraisal is lower than the offer price?

If an appraisal comes in lower than the agreed-upon price, it can immediately complicate matters for both the buyer and the seller.

That’s because the buyer won’t be able to get a loan from their lender that’s large enough to cover the full purchase price, if needed. The good news is that most buyers make a down payment of at least some amount (in the case of a conventional loan and an FHA loan, it’s required), which means they won’t need to borrow the full asking price.

However, if a buyer is using a VA or USDA loan that requires no money down and they need the loan to cover the full asking price, they have a few options as potential work-arounds. More on those in just a minute.

What causes low appraisals?

At least one of a few common factors typically cause a low appraisal. For example:

• The appraiser used outdated information. Confirm that the most recent information on comparable properties was used. If it wasn’t, this could compromise the appraisal’s accuracy. It’s especially imperative to get accurate info if you’re selling in a competitive housing market where houses regularly sell above asking price.
• The appraiser didn’t include home improvements. If an appraiser leaves out information on significant home improvements or can’t find appropriate comparisons in the area, the appraisal could come back lower and be less accurate.
• Local homes are appreciating. Low appraisals can also be a problem in neighborhoods with homes that are rapidly appreciating. Since the properties have appreciated so quickly, the comps may not reflect the prices that the sellers currently offer.
• The appraiser made simple mistakes. Mistakes that commonly lower an appraised value include miscalculation of square footage and failure to include garages/sheds or recent renovations.

What to do if you get a low appraisal

Seeing an appraisal come in low can be a shock for some home buyers, but there are a few actions you can take if you find yourself in this situation.

Request a second look

Your real estate agent will take the lead in pushing back on a low appraisal. If they find a discrepancy in the appraisal report, they can ask for a correction/revision.

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’s based on the additional information your agent submitted.

However, in the absence of well-substantiated claims of an oversight, most lenders – including Rocket Mortgage^® – are unlikely to agree to a second request for an appraisal.

Make 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, the buyer will have to make up the difference in the purchase price and the loan amount the lender is willing to offer. You may be able to tap into a 401(k) or ask a family member for a monetary gift you can put toward the purchase, but be sure to consult your financial advisor before making any big decisions.

Another way to eliminate the appraisal gap is by digging into your own cash reserves to increase the amount of your down payment or make a down payment you weren’t planning to make at all.

Attempt To Renegotiate The Purchase Price

In a buyer’s market, where the buyer holds more negotiating power, a motivated seller might be incentivized to renegotiate the purchase price – especially if they’re extremely eager to sell their home. As a buyer, it can’t hurt to attempt to negotiate a new purchase price.

Utilize an appraisal contingency and walk away

If the buyer can’t come up with more cash and the seller won’t lower the price, the buyer may have no choice but to back out of the sale. If the purchase agreement doesn’t contain an appraisal contingency, the buyer will lose their earnest money deposit and possibly even face legal action.

If you’re in the position of having to walk away, take solace in knowing that if the house isn’t worth what you’re willing to pay, you would end up underwater on your mortgage for at least a period of time. “Underwater,” in mortgage lingo, means the house is worth less than you owe on the mortgage. As a result, you’d still owe your lender money and you wouldn’t reap a profit even if you sold the house for its full value.

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

How to negotiate with a seller after a low appraisal

If you have an appraisal contingency in the purchase agreement and the appraisal comes in low, you can back out of the sale with no questions asked and without losing your earnest money deposit.

Here are a couple of ways you can attempt to kick-start negotiations if you wish to press forward:

• Check with your lender to see if a second appraisal can be requested. You’ll need to submit additional information to show the first appraisal was deficient.
• Have your real estate agent approach the listing agent about reducing the asking price.
• Talk with your real estate agent.

Tips for sellers on how to avoid a low appraisal

While there’s not much, if anything, a buyer can do to avoid a low appraisal since they have no control yet over the house they’re looking to purchase, the seller – who still lives there – can potentially exert some influence.

The work you can do as a seller to avoid a low appraisal all boils down to being prepared. In short: Make it easy for the appraiser and be engaged in the process.

Here are three practical ways to make a low appraisal less likely:

• Prepare the home inside and out.
• Be prepared to answer any questions the appraiser may have.
• Provide the appraiser with a list of upgrades and their completion dates.

The bottom line: A home buyer may have options if an appraisal comes in low

When you’re in the process of buying a home, you’ll encounter a number of moving pieces. A big one is the home appraisal. Low appraisals happen from time to time and can cause delays and major uncertainty for all parties involved. However, by working with your real estate agent and your lender, you may be able to resolve this issue and continue toward closing.

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