What if the appraisal comes back lower than the offer? Here’s what’s next.

If you’re buying or selling a home, the appraisal process is one of the final hurdles you’ll need to pass before closing day. A home appraisal will confirm the home’s value and ideally clear the way for the lender to approve the buyer’s mortgage loan.

If the appraisal comes back lower than the offer, it can delay or hinder your ability to move forward with the transaction.

Mortgage lenders don’t want to lend more money than the appraised value, which may cause the buyer to back out of the deal. Before the appraisal, it’s important to understand your options if the home is worth less than what you expect.

What does a low home appraisal mean?

If a house appraisal comes in low, it means the appraiser assessed the home’s value lower than the purchase price that the buyer and seller agreed on. To get an idea of what this looks like, let’s say you’ve agreed on a purchase price of $550,000. The appraisal came in at $510,000, meaning the appraised value is less than the offer.

The appraisal provides a snapshot of the home’s current value based on the property’s characteristics and what prices similar homes nearby have recently sold for. If the appraiser assigns a home value lower than the offer price, your real estate agent can provide valuable guidance on what steps to take next.

How often do home appraisals come in low?

It’s uncommon that home appraisals come in low, but it still happens.  Industry data suggests that roughly 5% – 10% of appraisals come in below contract price, though this varies significantly by market conditions. Keep in mind that this is just an estimate and can vary by market, particularly in areas where home values increase or decrease more rapidly.

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

If an appraisal comes in lower than the agreed-upon price, it can be tough news, as it complicates the closing process for both buyers and sellers. For buyers, it’s very likely your lender won’t approve a loan that’s large enough to cover the full purchase price.

While VA and USDA loans allow 0% down payments, buyers can still choose to bring additional cash to cover an appraisal gap if needed. The good news is that most buyers make a down payment, especially with a conventional or FHA loan, where it’s required. In this case, you aren’t asking for a loan to cover the entire asking price.

However, your lender may still not cover enough of the loan, leaving you to make up the difference, regardless of the loan type. There are some options you have if this happens, which we’ll cover later.

What causes low appraisals?

There are a few common factors that could hurt a home appraisal. Some reasons include:

• The appraiser used outdated information: It’s possible the appraiser didn’t use the most recent comparable properties on the market. This could be due to fast appreciation in an area, which could compromise the appraisal’s accuracy. Using accurate information is key in competitive housing markets 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 may not be accurate and could come back lower.
• The appraiser made simple mistakes: Common mistakes that might cause a low appraised value include square footage miscalculation and failure to include garages, sheds, or recent renovations.
• There was a bidding war on the property: Bidding wars can push the final purchase price above the home’s market value. As a result, the appraisal may come in lower than the price buyers were willing to pay.

What to do if you get a low appraisal

As a buyer, it can certainly come as a surprise if you receive a low appraisal, but there are a few actions you can take if you find yourself in this situation.

Request a second appraisal

Your real estate agent will take the lead in pushing back on a low appraisal. They’ll start by thoroughly reading the appraisal report to check for any errors. If your agent finds a discrepancy in the appraisal report, they can ask for a correction or revision.

By submitting proof of the oversight and working together with the lender, your agent could get the closing process back on track, but your closing date might be delayed. If the lender grants a second appraisal, you’ll likely have to pay for an additional appraisal.

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.

This can seem like a steep ask if you’re already nearing the top of your budget.  As a buyer, you should carefully evaluate the financial effects before using retirement or emergency funds, though this is an option. Be sure to consult your financial advisor before making any big decisions that may impact your finances down the road.

Another way to eliminate the appraisal gap is by tapping into your additional savings resources to increase your down payment amount. While it may not be ideal, in some cases, this could be the easiest option.

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

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 there’s an appraisal contingency in the purchase agreement and the appraisal comes in low, the buyer can back out of the sale with no questions asked and without losing the earnest money deposit.

If the purchase agreement doesn’t contain an appraisal contingency, the buyer may lose their earnest money deposit or other contractual consequences.

Walk away from the sale if needed

As a buyer, if you end up needing to walk away, know that it may be the best option in the long run. If the house isn’t worth what you’re willing to pay, you'd likely end up underwater on your mortgage for at least a period of time.

To have an “underwater” home generally 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 make a profit even if you sold the house for its full value. You’d also likely have a hard time refinancing your home because the loan-to-value ratio (LTV) is too high.

How to negotiate with a seller after a low appraisal

If you’re set on buying the home, you can attempt to negotiate with the seller. Here are a couple of ways to start:

• Check with your lender to see if a second appraisal can be requested. You’ll need to submit additional information to show that the first appraisal was deficient.
• Talk with your real estate agent about approaching the listing agent to ask about reducing the asking price.
• Ask if the seller is willing to offer concessions that would reduce your closing costs. This could free up funds you may need to cover the appraisal gap.

Tips for sellers on how to avoid a low appraisal

Since buyers have no control over the house they’re looking to purchase, there’s little they can do to avoid a low appraisal. For sellers, there are a few things you can do to help influence the appraisal.

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

• Prepare the home inside and out: Declutter and clean your space, make minor repairs such as fixing a leaky faucet, freshen exterior painting, and mow the front lawn and trim trees.
• Be prepared to answer any questions the appraiser may have: Showcase recent repairs, give the appraiser access to all spaces, and keep documentation on comps handy.
• Provide the appraiser with a list of upgrades and their completion dates: Have this information easily accessible to help the appraiser make an accurate assessment of the home.
• Price the home accurately: It’s important to price your house strategically from the beginning, especially in areas where the housing market changes rapidly. A good real estate agent can help you price your home effectively to prevent this issue.

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

A home appraisal is a key final step towards closing day. While uncommon, it’s possible to receive a low appraisal, which could cause delays or stall the home buying process. Understanding your options if the appraisal comes in low and working with a qualified real estate agent can help resolve any issues and keep closing on track.

Whether you continue your home buying journey or decide to walk away from the home, Rocket Mortgage can help you kick off the preapproval process or start your mortgage application.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Refinancing may increase finance charges over the life of the loan.

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