Dealing With a Low Appraisal

When you’re buying a home, part of the closing process will include getting a home appraisal if you’re applying for a mortgage. Basically, an appraisal evaluates the home to determine its value. When an appraisal comes in below what you’ve agreed to pay for the home, it puts your home purchase in jeopardy because the lender won’t loan you the amount that the seller wants. So what do you do if you get a low appraisal? Here are your options.

Why appraisals sometimes come in low

First of all, let’s discuss why appraisals can come in low. Sometimes, you may get a new appraiser who isn’t familiar with the market or lacks the experience to evaluate your home correctly. Other times, the sellers may have priced their home too high, which isn’t altogether uncommon in today’s seller’s market. Market values have been rising quickly during the pandemic, and it can take time for appraisers to catch up. This results in the appraiser saying the home is worth less than what you’ve agreed to pay for it. So now what happens?

Pay difference with cash

If you have the means, the easiest way to deal with a low appraisal is to simply pay the difference in cash. The lender will not loan you more than what the appraiser said the home is worth, so you’ll need to cover that gap with your own cash. Your lender is only concerned with the loan-to-value ratio, which means how much of the value of the home is taken up with the mortgage. The lender will only make a loan for the loan-to-value ratio as agreed to in your contract.

Negotiate a price reduction

Another way to deal with a low appraisal is to negotiate a price reduction with the seller. Of course, the seller will want to get top dollar for their home. But they may realize that if your deal falls through, the next deal could also fall through for the same reason. In addition, an appraisal has a term of validity. These usually last anywhere from 120 – 180 days, so the seller will be stuck with that valuation for some time. If you don’t have the cash to cover the difference, then asking for a break on price is your next best bet. You can also split the difference 50/50, where the buyer pays half the difference in cash and the seller knocks half the difference off the price.

Dispute the appraisal

Sometimes the appraiser gets it wrong. If you think that’s the case, then ask your lender to request a second appraisal. You can also get a list of comparable sales from your real estate agent and give it to your underwriter. Ask the underwriter to review the appraisal using the comps you’ve provided. You can also ask your agent to find out the sales prices of pending sales in the area. Housing values have increased quickly this year, so this may be a good route to try.

Back out of the deal

Finally, you may just need to back out of the deal if there’s no compromise that can be made. If you have a financing contingency in your contract then you won’t be penalized. This is one reason why including a financing contingency is so important when making an offer on a home, especially in today’s market.

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