What Happens When an Appraisal Is Lower Than the Offer?

A home appraisal is a professional assessment of a property’s market value. This evaluation ensures the agreed-upon sale price aligns with the home’s true worth. A situation can arise where the appraisal value comes in lower than the offer price. This discrepancy can complicate the sale process for both the buyer and seller.

The Appraisal’s Role in Home Financing

A low appraisal presents a challenge in a real estate transaction due to its direct impact on mortgage financing. Lenders require an appraisal to confirm the property’s value is sufficient to cover the loan amount, minimizing their financial risk. The amount a lender will finance is based on the appraised value or the sale price, whichever is lower.

Lenders use the Loan-to-Value (LTV) ratio to assess lending risk. This ratio compares the mortgage loan amount to the property’s value. For example, an 80% LTV means the mortgage covers 80% of the property’s value, with the remaining 20% being the buyer’s down payment. A lower appraisal reduces the maximum loan amount a lender will offer, even if the buyer and seller agreed to a higher purchase price.

This reduction creates an “appraisal gap,” which is the difference between the lower appraised value and the higher agreed-upon sale price. The buyer is responsible for covering this gap out of pocket, in addition to their initial planned down payment. If the buyer cannot pay this extra cash, the financing for the original offer price becomes unfeasible, potentially jeopardizing the entire transaction.

Buyer’s Options Following a Low Appraisal

When a home appraisal comes in lower than the agreed-upon offer, buyers have several options. Each choice carries financial and contractual implications. The presence of an appraisal contingency in the purchase agreement often dictates a buyer’s flexibility.

One option is to renegotiate the purchase price with the seller. If an appraisal contingency is part of the contract, the buyer can request the seller lower the sale price to match the appraised value. This protects the buyer from overpaying and allows the deal to proceed with the lender’s approved loan amount.

The buyer can also choose to cover the appraisal gap in cash. This means paying the difference between the appraised value and the offer price out of their own funds, in addition to their intended down payment. While this option saves the deal, it requires the buyer to have additional liquid assets available.

If renegotiation is unsuccessful and the buyer is unwilling or unable to pay the difference, walking away from the deal is a third option. With an appraisal contingency in place, the buyer has the right to terminate the contract and receive their earnest money deposit back. Without such a contingency, walking away may result in the forfeiture of the earnest money.

Seller’s Options Following a Low Appraisal

When a property appraises for less than the agreed-upon offer, sellers face decisions that impact the sale. Their response often depends on market conditions, urgency to sell, and financial goals.

One option for the seller is to lower the sale price to match the appraised value. This action directly addresses the appraisal gap and can save the transaction by aligning the price with what the lender is willing to finance. While it may mean receiving less than the initial offer, it often ensures the deal closes quickly, avoiding further delays and costs.

A seller can also challenge the appraisal. This involves working with their real estate agent to identify potential errors or omissions in the appraisal report, such as factual inaccuracies or unsuitable comparable sales data. The seller can then submit this information to the buyer’s lender, requesting a reconsideration of value.

The seller can also choose to insist on the original price, refusing to lower it despite the low appraisal. This stance places the burden on the buyer to either cover the appraisal gap or walk away. This option carries the risk of the current deal falling through, requiring the seller to relist the property, potentially incurring additional holding costs and marketing efforts.

Strategies for Bridging the Appraisal Gap

Successfully navigating a low appraisal requires a collaborative approach and strategic actions from both parties. Effective negotiation is the first step to bridging the appraisal gap, where buyers and sellers work to find a mutually agreeable solution. This might involve the seller reducing the price, the buyer increasing their cash contribution, or a combination of both, often splitting the difference. The goal is to reach a new purchase price that satisfies both parties and the lender’s requirements.

The appraisal challenge process, formally known as a Reconsideration of Value (ROV), is a mechanism for addressing concerns about an appraisal. To initiate an ROV, the party disputing the appraisal (the buyer or seller through their agent) gathers evidence such as recent comparable sales not considered, property features overlooked, or factual errors in the report. This documentation is submitted to the lender, who forwards it to the appraiser for review. An ROV is not a guarantee of a higher valuation; it aims to correct inaccuracies or omissions.

Appraisal contingencies in the purchase agreement provide a contractual framework for these discussions and potential outcomes. They protect the buyer by allowing them to renegotiate or terminate the contract without penalty if the appraisal falls short. These contingencies create a clear pathway for addressing the appraisal gap and ensure both parties understand their rights and obligations. Real estate agents and mortgage lenders play a significant role in facilitating these discussions, providing guidance, and ensuring all necessary documentation is handled correctly to move the transaction forward.