What to Do When Your Home Appraisal Falls Short?

If an appraisal comes in lower than the purchase price, there are a few things that can happen. It’s important to understand that the appraised value is what’s used to calculate your loan-to-value (LTV) ratio, not the purchase cost. Here are some options to consider if an appraisal comes in low:
  • Pay the difference: If you really want the property, you can choose to pay the difference between the appraised value and the purchase price out of pocket. This means that you’ll need to have the additional funds available, whether it’s in savings or through a personal loan. It’s important to note that this will increase your down payment and could affect your monthly mortgage payments.
  • Negotiate with the seller: Another option is to try and negotiate with the seller to lower the purchase price to match the appraised value. This can be challenging, as the seller may not want to budge on the price. However, if you have a good real estate agent, they may be able to help you make a compelling case for why the price should be lowered.
  • Reconsider the purchase: If the appraisal comes in significantly lower than the purchase price, you may want to reconsider the purchase altogether. This is especially true if you can’t afford to pay the difference out of pocket and the seller isn’t willing to lower the price. Remember, a home is a big investment, and you want to make sure you’re making a smart financial decision.
  • Overall, having an appraisal come in low can be a frustrating and stressful experience. It’s important to stay calm and consider all of your options before making a decision. Your real estate agent and lender can be great resources and can help guide you through the process.
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    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.
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    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.
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    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.
    In summary, a low appraisal can have significant implications for a mortgage applicant. However, by understanding the appraisal process, the reasons behind low appraisals, and your lender’s response options, you are better placed to plan for potential outcomes.

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