What Happens If a House Doesn’t Appraise?

A home appraisal is an impartial assessment that estimates a property’s market value. This evaluation is a standard part of real estate transactions, especially when a mortgage lender is involved, as it helps determine the appropriate loan amount. The appraised value directly influences how much a lender is willing to finance, ensuring the loan aligns with the property’s actual worth. When a home appraises for less than the agreed-upon purchase price, it creates an appraisal gap, challenging both buyers and sellers.

Immediate Financial Impact

A low appraisal directly impacts the buyer’s mortgage loan, affecting the loan-to-value (LTV) ratio. Lenders base their maximum loan amount on the appraised value, not the purchase price, to mitigate financial risk. For instance, if a home is under contract for $300,000 but appraises at $290,000, a lender offering 80% LTV would only finance $232,000 (80% of $290,000), rather than $240,000 (80% of $300,000). The buyer must address this $8,000 shortfall.

The appraisal contingency clause in the purchase agreement is particularly relevant. This clause allows the buyer to renegotiate terms or withdraw from the contract without losing earnest money if the appraisal falls below a specified value. Without this contingency, the buyer might be obligated to proceed at the original price, potentially forfeiting earnest money if they cannot secure financing or choose to walk away. A lower appraised value can also affect the buyer’s equity position and lead to higher interest rates or private mortgage insurance (PMI) if the down payment percentage decreases.

Buyer Options

When a low appraisal occurs, buyers have several options. One is to cover the appraisal gap with additional cash, increasing their down payment to meet lender requirements. This means bringing extra funds to closing beyond the initial planned down payment and closing costs.

Buyers can also renegotiate the purchase price with the seller to match the appraised value. This is a common solution. If protected by an appraisal contingency, the buyer can walk away from the deal and receive their earnest money back. Buyers might also seek a second appraisal, although lenders may not always accept it, and the buyer typically bears the additional cost.

Seller Options

Sellers also face choices when a home appraises for less than the agreed-upon price. One common response is to lower the sale price to align with the appraised value. This can help keep the transaction on track and avoid the uncertainty of finding a new buyer.

Another possibility is for the seller to offer concessions or credits to the buyer, which can help bridge the appraisal gap without directly reducing the sale price. These might include contributions towards closing costs, which frees up cash for the buyer to cover the difference. The seller could also refuse to lower the price, risking the buyer walking away from the deal, which might necessitate relisting the property. Challenging the appraisal is an option, typically initiated by the lender or the seller’s agent providing supporting data.

Negotiating the Appraisal Difference

Bridging an appraisal gap often involves negotiation between the buyer and seller. A common compromise is to split the difference, where both parties contribute a portion of the shortfall. For example, if there is a $10,000 gap, the buyer might bring an additional $5,000 in cash, and the seller might reduce the price by $5,000.

Sellers can offer various concessions instead of a direct price reduction. These might include covering some of the buyer’s closing costs or funding specific repairs identified during inspections. Such concessions can reduce the buyer’s out-of-pocket expenses, making it easier to cover any remaining appraisal gap. Real estate agents play a role in facilitating these discussions, providing market insights, and helping parties explore solutions.

Challenging the Appraisal

If a low appraisal is suspected to be inaccurate, a formal challenge, known as a Reconsideration of Value (ROV), can be initiated. This process requires providing evidence to the lender, who then submits the request to the appraiser. Valid grounds for an ROV include factual errors in the appraisal report, such as incorrect square footage or property characteristics, or the appraiser overlooking relevant comparable sales.

To support an ROV, parties should gather comparable sales data from similar properties, especially those that closed recently and were not included in the original report. Documentation of recent home improvements or renovations missed by the appraiser, such as receipts or permits, can also be submitted. A successful ROV is not guaranteed, but presenting strong, objective evidence increases the likelihood of a revised appraisal.