What Should You Do If The Home Appraisal Value Is Lower Than The Offer Price?
Andrew Dehan7-minute read
November 28, 2022
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.
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.
What Does A Low Appraisal Mean?
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.
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How Do Appraisals Work?
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.
What Causes Low Appraisals?
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.
How Often Do Home Appraisals Come In Low?
According to a survey done by the National Association of REALTORs® in 2021, 11% of sales contracts were terminated due to appraisal problems, and 22% of contracts were delayed due to appraisals. Still, that means most of the time the sales complete without 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.
What Are Some Common Appraisal Problems?
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
What Happens If I Get A Low Appraisal When I’m Refinancing My Home Loan?
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.
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What Can I Do If I Get A Low Appraisal?
There are a few possible scenarios in this situation.
Parties Can 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 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.
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
In a buyer’s market, where the buyer holds more negotiating power, a motivated seller might be incentivized to lower the sale price to the appraised value.
Buyer Exercises Their Appraisal Contingency And Walks Away From The Sale
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.
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.
How To Negotiate With A Seller After A 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.
- Approach the seller about reducing the asking price.
- Talk to your real estate agent.
- Do your research and know your leverage.
Tips To Avoid 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 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.
The Bottom Line: You Have Options When An Appraisal Comes In Low
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.
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