If you’re buying a home, you’ll need an appraisal on the property. This is how lenders determine the value of the collateral (the home). If a home appraisal comes in lower than expected, it can delay the sales process, but you have options – it’s not always a deal-breaker.
Here’s what you must know.
Why do you Need an Appraisal?
First, you need an appraisal for the lender (and yourself). An appraisal is a professional opinion on the home’s value based on recently sold homes. You wouldn’t want to pay more for a home than it’s worth and lenders don’t want to lend more money on a home than its value.
If you defaulted on the loan and the lender took possession, they wouldn’t make their money back when they sold the home. If you didn’t default, but you tried to sell the home, you may owe more than you’ll get for the home – probably not the situation you hoped for.
Options for a Low Appraisal
Low appraisals happen all the time, unfortunately, especially in today’s market with buyers trying to outbid one another.
If you find yourself with an appraised value lower than you offered to pay, here are your options:
- Negotiate a new sales price – You always have the option to go back to the seller and renegotiate the deal. The seller may have been misinformed or assumed his/her home was worth more than it is. Some sellers are willing accept a lower price to meet the current value.
- Make a larger down payment – Lenders base your LTV (loan-to-value ratio) on the home’s value, not the sales price. If the appraised value comes in lower, this decreases your available loan amount. If you have the cash, you can increase your down payment to make up the difference and proceed with the loan as is.
- Cancel the contract – If the home doesn’t appraise for the value you thought, you could cancel the contract. You’ll need the seller to agree to do the same, especially if you didn’t put an appraisal contingency on the contract.
- Ask for a second opinion – If you don’t agree with the appraisal, you can ask for an appraisal review (rebuttal) or even order a second appraisal (in some cases). If you have other comparable sales you think are a better fit, you can submit them for review.
If your home appraisal comes in low, think about it carefully. Do you want to enter a sale upside down (investing more than the home is worth)? In some cases, it makes sense, especially if you’ll live in the home long-term. But if this is a temporary purchase that you’ll sell in a couple of years, look at other options before investing your money.
An appraisal helps you understand your investment. Even though it feels like it’s ‘against’ you, it’s a precaution to ensure you don’t get in over your head.
Written by the Mortgage Loan Center.