A lot of questions can keep a home buyer awake at night. What if we can’t find a house before our lease ends? What if we fall in love with a house and get bad news during the inspection?
Add one more question to the list: What happens if the appraisal comes in low? Here’s what to do so you can rest easy.
What is a home appraisal?
If you are obtaining a mortgage to purchase a home, a bank appraisal is necessary.
Why? Because your lending partner is going to be highly invested in your purchase. For instance, if you are putting down 5%, the lender is bringing 95% to the closing table. That’s a lot of money!
Understandably, your lender will want to do some research on your future home to make sure it’s a solid investment. To do this, a bank will send out an appraiser to determine the fair market value of your property based on recent sales and comparable market data.
Why would a home appraisal come in low?
Sometimes the appraised price comes back lower than the agreed-upon purchase price. Let’s say you offered $390,000. After signing the purchase agreement and moving forward with your financing, the bank appraiser determines that the value is only $380,000. Why does this happen?
There are a few reasons.
In competitive housing markets where there are multiple bids, the demand on a property can push the price beyond what an appraiser determines it is worth. Appraisers work off historical data and need to back up your purchase price with recently sold comparable houses.
Seasonal peaks can be another culprit. For example, early spring is the most common time for low appraisals in New England. The nice weather gets buyers out of the winter slump, and all the fresh inventory and activity can drive prices upward. This makes it tough for appraisers who have to pull from winter sales to justify current values and seasonal pricing spikes.
Another reason your appraisal may come in low is if the appraiser missed the mark.
For most residential transactions, you can’t choose the appraiser, because as the buyer, it’s a conflict of interest. But if the appraiser is new at the job or from out of town, they may make some oversights and come up with an opinion that doesn’t make sense.
Appraisers use historical data and comparable homes to build a case about value. But in some situations, there aren’t enough comps to justify pricing. In these cases, the appraiser will be conservative.
What if the appraisal is lower than purchase price: your options
A low appraisal is bad news because the lender will only provide a loan up to the appraised value, overriding your agreed-upon purchase price. Going back to the example provided earlier, who covers the $10,000 discrepancy between your offer of $390,000 and the appraisal of $380,000?
There are a few things you can do. First, scrutinize the appraisal. Do you see any glaring issues? Did the appraiser miss something or overlook a perfect comp? Speak with your lender to see if there’s anything you can do to get a second opinion and revisit the report. You may want to order a new appraisal if things are really out of whack.
If ordering a new appraisal doesn’t seem like the best path forward, you have other options:
Ask for a price reduction
Are the sellers motivated? The easiest solution is for them to drop the price down to the appraised value. If the situation is not competitive, you might be able to get the seller to reduce the sale price based on the findings within the appraisal report. This would be the best-case scenario for you.
If they won’t drop the price all the way, you may still be able to negotiate a reduction and meet them in the middle.
Find the money
If the seller isn’t motivated or has plenty of backup offers, they may tell you to take it or leave it. At that point, you need to decide if you can put the extra money down to cover the difference. Putting more money down will offset the low appraisal.
Reconfigure your financing
What if you don’t have the money to pay out of pocket? You may be able to work with your lender on a new program that frees up some cash. Rather than putting down the amount you intended, you can put down a little less and use the extra cushion to close the gap between the purchase price and the appraisal price.
If all else fails, you can terminate the transaction if you have a financing contingency.