You’ve chosen to buy a house or maybe you’re refinancing and everything’s going along great. The inspection has passed, things look like they’re moving forward, and then you get the appraisal back. Oh no! The appraisal came in lower than expected. Now, what do you do?
Home appraisals are often required for refinancing loans so that the lender can verify the property is valued at the loan amount. But, even if you are buying a house, the appraisal needs to meet the value otherwise the lender will not just hand over money on a house that’s overvalued. So what happens when you can’t buy the house or refinance because of a low appraised value?
There are several options and the first is to get a second opinion. You can either go with another lender or use a different appraiser that might come up with a higher value, but you will probably be paying for another appraisal appointment.
This may or may not be something you’ll want to undertake but there are other options.
You can simply appeal the appraisal. Going back to either the lender or the appraiser with additional information could increase the value enough to where it covers the loan. But again, there has to be significant evidence. If you have proof that similar homes have sold in the same area recently for higher values. If there’s additional work that’s been done to the house that the appraiser didn’t know about. Or you can simply ask for a second appointment, but again, you’ll probably be paying for it.
You can do a ‘cash in’ refinance or add cash at closing. If you’re buying a home and it just won’t appraise for what the seller is asking, you can bring actual cash to the table to make up the difference. But remember, as soon as you do this, the home will be underwater, which means you are now paying more for a property that is not valued as such. This is a risk but it also depends on how much you love the home.
You can simply cancel the refinance or find a different house until you gain more equity or have the seller lower the price of the home itself. This is more common because sellers realize they’re not going to get what they are asking for from anyone, so lowering the price to meet the value is usually the most appropriate response.
Your lender may not even allow for an additional appraisal, which means you’ll need to go with a different lender and start all over. Many lenders go with automated appraisals to save time and money but this causes problems in that many appraisers simply do a drive-by, and have no idea if there’s been interior upgrades and improvements increasing the value.
If the home appraises for less than its asking price it can affect the mortgage and affect the purchase and sale contract. Mortgage lenders use the appraiser determined value to determine the value part of your loan to value ratio. If the appraised value is less than the asking price, lenders use that value to determine your loan to value. Unless the seller agrees to lower the price, buyers will need to increase their down payment to get the same mortgage and interest rate.
If you’re purchasing a home there really are only four options:
- The seller and buyer renegotiate a new, lower home price.
- The buyer can increase their down payment and bring more cash to closing.
- The seller and buyer cancel and terminates the entire contract starting over for both.
- The buyer and seller request an appraisal rebuttal or order a new appraisal.
Home purchase contracts can often include an appraisal contingency. If the home doesn’t appraise for its purchase price, the contingency clause allows buyers to reevaluate whether or not this is the home for them. FHA loans require this contingency and these contingencies may be used to renegotiate or simply get out of a contract if an appraiser identifies required repairs or other issues that the buyer or seller just don’t want to deal with.
But what if you are the seller?
What happens if your real estate agent simply listed the home too high? If you are noticing that you’re not getting any buyers in the home or bites on the listing, it may be time to lower the price. However, in hotter markets, it’s very common to list a home at a higher price, assuming the competition will continue to drive up the value, but again, the appraisal must still come in at value. Regardless of what someone will pay for it, if they can’t get a loan and they are unwilling to put in more cash, the deal stays stagnant.
What about new construction?
New construction is a little bit different and it depends on the type of loan. If buyers build a custom home on a lot that they own, buyers can get a construction loan to finance the building. The lender will base the loan amount on the “improved value” of the property. Once the builder finishes the home, the new loan will pay off the construction loan and take on a new permanent type of financing. But, if this home does not appraise for its estimated value, and you’ve already bought the home and built it, you may need to either try a new lender, get a new appraisal, or ask the builder to take less money. If the low appraisal is the builder’s fault, you may actually be able to sue your builder.
Regardless, there are many options if the appraisal comes into low and it’s something to discuss with your agent and your lender. Everyone wants all of the puzzle pieces to fit beautifully at closing but because there are so many different factors involved in the building, refinancing, or purchasing of a home, things can go sideways in a lot of different ways. Stay in tight communication with your agent and your lender to find a solution that works for everyone.