Understanding the Appraisal Process
The property appraisal is an integral part of the home buying process. Essentially, it is an unbiased third party’s assessment of the market value of the property you want to buy or refinance. The appraisal helps to ensure that the loan amount being offered by a lender is accurate based on the property’s market worth. An appraiser typically considers several factors in arriving at the appraised value, including the property’s location, size and condition, amenities, and comparable sales in the area, among other things. Once the appraisal report is complete, it is sent to the lender for review and approval before the loan is issued.Why Appraisals Come in Low
There are several reasons why an appraisal can come in lower than expected, which can have significant ramifications for a mortgage applicant. One of the primary reasons for a low appraisal is inaccurate market data. If the appraiser is using outdated or incorrect comparable sales, the appraisal value will not be accurate. Inaccurate data might include the appraiser not being aware of upgrades or renovations that have been made, or perhaps a lack of information on distressed or bank-owned properties in the area. Another reason for low appraisals is the appraiser’s assessment of the property’s condition, cleanliness or any other issues that may reduce marketability. The condition of the property, especially its age, has a significant impact on its value.The Impact on Your Loan-to-Value Ratio
If the appraised value of a property comes in low, it has consequences on the loan-to-value (LTV) ratio, which helps determine how much a lender is willing to lend. A low appraisal means that the loan amount must be adjusted downward so that the LTV ratio matches the lender’s maximum guidelines. For instance, if your lender agrees to fund 80% of the accurate appraised value of the property, and the appraisal values your property at $500k, it means you may receive a loan of up to $400k. If the appraisal report values the property at $450k, the lender will cap their loan amount at $360k, max. This change will inevitably impact your budget, and you might need to think about sourcing additional funds or negotiating with the seller for a lower purchase price.How Lenders Respond to Low Appraisals
Generally, a lender has several options if the appraisal comes in low. The most straightforward approach is to review the report thoroughly to ensure that no errors were made and that the appraised value is credible. If there were any discrepancies, the lender might ask the appraiser to review and make corrections where necessary. Alternatively, the lender may request a second appraisal from a different appraiser to get a second opinion. If both appraisals concur, the lender might allow you to proceed to the loan with a revised maximum loan amount.Options for Covering the Shortfall
When a low appraisal puts a dent in your scheduled funds, you can consider several options:- Appeal the appraisal: You might discuss the appraisal errors with your lender and request a new appraisal; however, not all lenders might allow this.
- Improve the appraised value: You might put more effort into enhancing the property’s curb appeal by taking care of any landscaping, repainting the interior or exterior surfaces, or updating appliances.
- Pay more cash upfront:If the shortfall is minimal, you may choose to pay the difference from your pockets and proceed with the loan.
Negotiating with the Seller
If the appraisal comes in low, you might negotiate with the seller to reduce the asking price. The seller may have an option to lower their prices, especially in a buyer’s market. If the seller is not interested in reducing the purchase price, and the shortfall is significant, you can consider moving on to another property or making up the difference with cash.Tips for Avoiding a Low Appraisal
While you might not have total control over an appraisal outcome, you could improve your chances of getting an accurate appraisal by doing the following:- Provide the appraiser with a list of upgrades or improvements made to the property.
- Point out any unique features or amenities to help justify the property’s value.
- Provide the appraiser with a list of comparable sales to support your assessment of the market value.
- Ensure that the property is in good condition by fixing any structural or cosmetic issues before the appraisal process.