Finding a home you love and getting your offer accepted can feel like a major step toward homeownership.
But there is still an important part of the mortgage process that can affect the transaction: the home appraisal.
An appraisal provides an independent opinion of the property’s value. Lenders use the appraised value as part of evaluating the property and determining how much they are willing to lend.
Sometimes, the appraisal comes in lower than the price you agreed to pay.
When that happens, you may wonder whether the mortgage will still be approved, whether you need to bring more money to closing, or whether the seller will lower the price.
A low appraisal does not necessarily mean the home purchase has to fall apart. However, it is important to understand your options and communicate with your mortgage professional and real estate agent.
What Is a Home Appraisal?
A home appraisal is an independent assessment of a property’s value performed by a qualified appraiser.
The appraiser considers factors such as the property’s condition, location, features, and comparable properties in the area.
The appraisal helps the lender determine whether the property provides enough value to support the mortgage being requested.
For example, if you agree to purchase a home for $400,000 and the appraisal comes in at $400,000, there is generally no difference between the purchase price and appraised value.
But if the appraisal comes in at $380,000, the lender may have concerns about financing the full $400,000 purchase price.
Why Does a Low Appraisal Matter?
A low appraisal can affect the mortgage because lenders consider the relationship between the loan amount and the value of the property.
This is commonly reflected through the loan-to-value ratio, or LTV.
When the appraised value is lower than the purchase price, the amount you are borrowing may represent a larger percentage of the property’s appraised value.
That can affect the amount the lender is willing to finance and could potentially require you to bring additional money to the transaction.
The exact impact depends on the mortgage program, loan amount, down payment, and other factors related to your loan.
What Happens If the Appraisal Is Lower Than the Purchase Price?
Suppose you agreed to purchase a home for $400,000, but the appraisal comes in at $380,000.
That creates a $20,000 difference between the purchase price and the appraised value.
This does not automatically mean you have to come up with the entire $20,000 difference.
Several options may be available depending on your purchase contract, financing, and the willingness of the seller to negotiate.
Your mortgage professional can help determine how the lower appraisal affects your loan, while your real estate agent can help you understand your options with the seller.
Can You Negotiate the Purchase Price?
One potential option is asking the seller to reduce the purchase price.
A low appraisal can provide evidence that the agreed-upon purchase price may be higher than the property’s appraised market value.
For example, if you agreed to pay $400,000 and the appraisal comes in at $380,000, you may ask the seller to reduce the price closer to the appraised value.
The seller does not necessarily have to agree.
Whether the seller is willing to renegotiate can depend on the local market, the seller’s situation, the strength of your offer, and how much interest there is from other buyers.
Your real estate agent can help you determine how to approach the conversation.
Can You Increase Your Down Payment?
Another possibility is bringing additional funds to closing.
If the seller does not agree to reduce the purchase price, you may be able to contribute more money toward the purchase, depending on your mortgage program and financial situation.
However, putting additional money into the purchase may significantly reduce your available savings.
Before making this decision, consider how much money you would have left for emergencies, moving expenses, repairs, and other costs associated with owning a home.
Your mortgage professional can help you understand how additional funds could affect your financing.
Can You Challenge a Low Appraisal?
In some situations, you may be able to request a reconsideration of value if you believe the appraisal contains factual errors, missing information, or inappropriate comparable properties.
Start by reviewing the appraisal carefully.
Look for issues such as:
- Incorrect information about the property
- Missing improvements or upgrades
- Incorrect square footage
- Incorrect number of bedrooms or bathrooms
- Comparable properties that may not be appropriate
- Other factual errors or relevant information that was not considered
If you identify information that could affect the valuation, discuss it with your mortgage professional.
A lender may have a process for requesting a reconsideration of value.
However, a reconsideration does not guarantee that the appraised value will change.
Can You Get Another Appraisal?
Depending on the circumstances and loan program, another valuation may sometimes be an option.
However, borrowers should not assume that simply ordering another appraisal will result in a higher value.
The lender and mortgage professional can explain what options are available for your particular loan.
Before paying for another valuation, understand whether the lender will accept it and whether it could actually change the financing decision.
Can the Seller Pay the Difference?
Another possibility may involve negotiating with the seller to address part of the appraisal gap through the terms of the transaction.
The exact options depend on the purchase contract, mortgage program, lender requirements, and applicable limits on seller contributions.
Your real estate agent and mortgage professional can help you determine what may be permitted in your situation.
Do not agree to a solution involving credits or concessions without understanding how it affects the purchase and mortgage.
What If You Cannot Reach an Agreement?
Sometimes the buyer and seller cannot agree on how to handle a low appraisal.
If the seller will not reduce the price and you do not want or cannot provide additional funds, you may need to consider whether continuing with the purchase makes financial sense.
Your purchase contract is important at this stage.
Depending on the terms of the contract, an appraisal contingency may provide certain protections or options if the property does not appraise at the agreed purchase price.
Because contracts vary, discuss your specific situation with your real estate agent and, when appropriate, a qualified attorney.
Does a Low Appraisal Mean Your Mortgage Is Denied?
Not necessarily.
A low appraisal does not automatically mean the mortgage will be denied.
The impact depends on factors such as:
- Loan amount
- Appraised value
- Down payment
- Loan program
- Loan-to-value ratio
- Borrower’s financial profile
- Seller negotiations
- Available funds
Your mortgage professional can review the new appraised value and determine how it affects the financing.
In some cases, the loan may still move forward with changes to the loan structure or the amount of money being brought to closing.
What Should You Do After Receiving a Low Appraisal?
The most important thing is to avoid making a rushed decision.
Start by talking with your mortgage professional and real estate agent.
Your mortgage professional can explain how the appraisal affects your financing and whether your loan amount or down payment needs to change.
Your real estate agent can help you evaluate the purchase price and negotiate with the seller if appropriate.
You should also review the appraisal itself and make sure the information appears accurate.
Understanding the numbers first can help you make a better decision about what to do next.
How Can Buyers Prepare for a Potential Appraisal Issue?
You cannot control the final appraised value of a home, but you can prepare for the possibility of an appraisal coming in lower than expected.
Before making an offer, consider how much money you would be comfortable putting toward the purchase if an appraisal issue occurs.
You should also understand any appraisal contingency in your purchase contract.
Working with an experienced real estate agent and mortgage professional can help you understand the potential risks before you make an offer.
Most importantly, avoid assuming that you will automatically be able to borrow enough to cover the entire purchase price.
Your mortgage financing is based on specific loan guidelines and the property’s value, among other factors.
How The Faille Team Can Help
A low appraisal can be stressful, especially when you are already emotionally invested in purchasing the home.
The Faille Team helps borrowers navigate different stages of the mortgage process, including financing, underwriting, and closing.
If an appraisal comes in lower than expected, your mortgage professional can help you understand how the new value affects your loan and what financing options may be available.
The goal is to make sure you understand the numbers before deciding how to move forward.
Conclusion
A low home appraisal does not automatically mean you have to give up on the property.
Depending on your situation, you may have several options, including negotiating with the seller, increasing your down payment, requesting a reconsideration of value, or adjusting the loan structure.
The right solution depends on your mortgage program, financial situation, purchase contract, and the willingness of the buyer and seller to negotiate.
If your appraisal comes in lower than the purchase price, do not make a quick decision.
Talk with your mortgage professional and real estate agent, review the appraisal carefully, and understand how the lower value affects your financing.
With the right information and guidance, you can determine whether the purchase still makes financial sense and choose the best way to move forward.
