In real estate, surprises aren’t always pleasant, especially for home appraisals. One of the most confusing moments is when the appraised value of a home is lower than the agreed-upon purchase price. In this situation, a wrench is thrown into the mortgage process. It impacts negotiation and can even jeopardize the deal. So, exactly what happens if your appraisal is lower than purchase price? And more importantly, what can you do about it?
In this comprehensive blog, we will take you through the consequences of a low appraisal, what causes them, and what your options are as a buyer or seller.
So without any further delay, let’s dive in.
A Home Appraisal
It is a third-party valuation of a property by a professional. Lenders require appraisals to ensure that your home is worth the amount that is being borrowed.
The factors that they look at are:
- Comparable home sales (comps).
- Property condition and features.
- Location and neighborhood trends.
- Market conditions.
The appraisal value influences how much a lender is willing to finance. If it comes according to the expected price, the transactions move forward smoothly; if the appraisal comes in too low, it creates a financing gap.
Why a Low Appraisal is a Problem
When home appraisal comes lower than the purchase price, lenders won’t approve the full mortgage amount.
For instance, your purchase price is $400k, but appraisal comes back low at $370k. The Loan-to-Value (LTV) ratio is 80%. And the loan amount approved is $296k (80% of $370k). The buyers must be able to cover either the $30k difference out of their pocket or renegotiate with the seller.
Causes of a Lower Appraisal
The common reasons for an appraisal lower than expected for low value of the home can be:
- Overpriced offer in a competitive market like Texas.
- Lack of comparable recent sales.
- Declining market conditions.
- Unique home features that are hard to value.
- Appraiser unfamiliar with the local market.
Appraisals aren’t always perfect. Sometimes, even seasoned professionals may undervalue a property due to outdated or irrelevant comparables.
Options if the Appraisals Come in Low
What happens if your appraisal is lower than purchase price? What can you do to tackle this appraisal gap? You can take a number of steps if the appraisal comes back lower than the purchase price.
- Renegotiate Purchase Price:As a sellers, you may be willing to lower the purchase price to the appraised value of your home to keep the deal intact. It is common if the house is not a hot one in the market.
- Split the Difference:The home buyers and the sellers agree to meet halfway the listing price. For instance, if the appraisal is $20k low, the seller may lower the price by $10k, and the buyer covers the other $10k.
- Dispute the Appraisal:You can request the reconsideration of the home value from the mortgage lender. It involves submitting updated comps or pointing out appraisal errors.
- Pay Out of the Pocket:If you want the deal done, make up the difference out of their own pocket. It increases the down payment, but the home loan stays intact.
- Walk Away:Most purchase agreements have the option to waive the appraisal contingency. If the home appraised value is too low and the issue can’t be resolved, the buyer can back out without losing any money.
There are also options available that you can use if you really want the house of your dreams, like using your 401(k). But is it a good idea to use your 401(k) to buy a house?
Working with a knowledgeable Realtor
If you want to navigate a low appraisal situation, you need experience and negotiating skills. If you don’t have it, you should hire someone who has. This is where Realtors like Nitin Kumar prove invaluable.
Top-performing real estate agents help buyers and sellers:
- Understand appraisal reports.
- Communicate with lenders.
- Prepare strong valuation rebuttals.
- Renegotiate offers.
- Access better comparable and local data.
Nitin’s deep understanding of the market helps clients avoid overpaying and undervaluing their property. Experienced Realtors’ strategies help buyers save thousands of dollars or salvage deals that seem doomed by low appraisals.
Sellers Preparing for Appraisals
If you are selling a home, a low appraised value of the home derail your sale. In order to minimize that risk and avoid a low appraisal:
- Price:Price your home realistically from the start of the journey.
- Provide: Provide the appraisers with the list of upgrades and home improvements that you have done over time.
- Highlight: Highlighting the recent comparable sales in your neighborhood can justify your asking price.
- Work: Work with a real estate agent who knows how to prepare an appraisal packet.
These proactive steps can prevent your home from getting a low valuation before it happens.
Real-Time Example
For example, you are a buyer who wants to buy the home of of their dreams in Dallas. You made an offer price of $525K on a home. The home appraisal comes in lower value at $495K, a shortfall of $30K. Your Realtor negotiated a $15K price reduction and helped you present alternative comps to justify a higher value. Eventually, the lender adjusted the appraisal to $510K, and you brought $15k cash to close the gap. And that is how your deal is closed on time.
How to Avoid Low Appraisals?
Here are a few tips for experts that can help you avoid low appraisals.
- Avoid overbidding without the appraisal protection.
- Use local lenders and appraisers who are familiar with the market.
- Provide all supporting documents to the appraisers to avoid any confusion.
- Time your purchase and sale during stable market periods.
Conclusion
So, what happens if your appraisal is lower than purchase price? Well, a low appraisal isn’t the end of the world. With clear options to handle a low appraisal and the right guidance, you can negotiate, challenge, or adjust to make the deal work. But if it is not working for you, you can simply walk away from the deal and move on to other houses if your contract allows you to.
Whether you are a buyer trying to get a home or a seller trying to preserve your sale price and the market value of your home, understanding your choices is crucial.
Want to discuss your low appraisal? Click here and benefit from expert real estate advice, tailored for the Texas market, to buy the home of your dreams.
Frequently Asked Questions
Q. What happens if an appraisal comes in lower than the offer?
A: As a potential home buyer, while buying a home if your appraisal comes in lower than the offer price, you need to renegotiate price of the home, pay the difference price to match appraisal on a home you want to buy, challenge the low appraisal value, or simply walk away from the deal if the contract and appraisal contingency may allow.
Q. How often do appraisals come in lower than the purchase price?
A: While it is not very common, however, in hot markets or bidding wars, it can happen more frequently if the market value of the home you’re selling is high.
Q. Do sellers usually lower prices after appraisal?
A: They may not always lower the sale price as a seller after a low appraisal, but many are open to renegotiation to lower their asking price to keep the deal intact and home sale on track. This happens especially if the appraisal is significantly off, they may lower their price during the home buying process.
Q. What happens if your house appraises for less than you bought it for?
A: If your house appraises for less than what you paid, it may affect your home equity or the ability to refinance. However, if you are not selling, it won’t immediately impact your mortgage.
