What If a Home Appraisal Comes In Low?

A home appraisal is an objective assessment of a property’s market value, performed by a licensed professional. This evaluation is a standard step in the home buying process, particularly when a mortgage is involved. Lenders rely on the appraisal to ensure the property’s value supports the loan amount. A common challenge arises when the appraised value comes in lower than the agreed-upon purchase price, potentially disrupting the transaction for both buyers and sellers.

Financial Impact on the Home Purchase

A low home appraisal directly affects the buyer’s mortgage loan and the cash required for purchase. Lenders determine the maximum loan amount based on the lower of the purchase price or the appraised value, using the loan-to-value (LTV) ratio. If the appraised value is lower than the agreed-upon price, the lender uses that lower value for LTV calculations.

For example, if a home is under contract for $300,000 with a 20% down payment, the buyer expects a $240,000 loan. However, if the appraisal comes in at $280,000, the lender will base the 80% LTV on $280,000, offering a maximum loan of $224,000. This creates a $16,000 gap between the expected loan amount and what the buyer needs to complete the purchase at the original price. The buyer is then responsible for covering this difference in cash, in addition to their planned down payment.

If the buyer cannot cover the appraisal gap, the transaction faces a significant hurdle. Lenders will not fund a loan exceeding their established LTV thresholds based on the appraised value, as the property would not provide sufficient collateral. This means the buyer must find additional funds, renegotiate the price, or potentially walk away from the deal.

The buyer’s mortgage commitment depends on the appraisal supporting the loan amount. Without funds to bridge the gap, the buyer’s loan approval might be jeopardized, preventing the purchase from moving forward. A low appraisal directly impacts the buyer’s out-of-pocket expenses and the transaction’s feasibility.

Negotiating the Purchase Price

When an appraisal comes in low, negotiation is key to salvaging the transaction. The goal is to reach a new agreement that accommodates the appraised value for both buyer and seller. Real estate agents play a significant role in facilitating these discussions, presenting options and advising clients. The seller’s agent typically communicates the low appraisal to the seller, explaining its financial ramifications for the buyer.

One common negotiation strategy is for the seller to reduce the purchase price to the appraised value. This eliminates the appraisal gap, allowing the buyer to proceed with original loan terms and down payment. A seller might consider this if market conditions suggest finding another buyer at the original price could be difficult, or if they are motivated to close quickly. Reducing the price can be the simplest path to keeping the deal alive.

Another option is for the buyer to increase their cash contribution to cover the difference between the appraised value and the original purchase price. This requires the buyer to have additional liquid funds beyond their planned down payment and closing costs. Buyers might choose this if highly motivated to purchase the property and believe its long-term value justifies the extra immediate expense. This option places the full financial burden of the low appraisal on the buyer.

A third solution is a compromise where both parties share the financial burden. The seller might agree to reduce the price by a portion of the appraisal gap, and the buyer agrees to cover the remaining difference in cash. For instance, if there is a $16,000 gap, the seller might reduce the price by $8,000, and the buyer brings an additional $8,000 to closing. This shared responsibility can make the transaction more palatable for both sides.

These negotiations typically involve formal amendments to the original purchase agreement, outlining the new agreed-upon price or cash contributions. The process requires open communication and compromise from both the buyer and the seller. Successfully navigating this phase can prevent the transaction from falling apart due to the appraisal discrepancy.

Challenging the Appraisal Report

If a low appraisal is received, buyers and their agents may challenge the appraisal report. This process, known as a Reconsideration of Value (ROV), involves submitting a request to the lender for the appraiser to review findings. Grounds for a successful challenge are typically based on verifiable errors or omissions. Such errors could include factual inaccuracies, like an incorrect number of bedrooms or bathrooms, or miscalculations of square footage.

Another basis for an ROV is the appraiser’s use of inappropriate comparable properties, often referred to as “comps.” This includes using sales that are too old, too far from the subject property, or not genuinely similar in size, condition, or features. Overlooking significant property features or recent upgrades that could enhance value, such as a new roof or a renovated kitchen, also provides grounds for a challenge. A lack of local expertise by the appraiser or even potential appraisal bias might also be cited.

To initiate an ROV, the buyer, with their agent, gathers compelling evidence. This documentation often includes recent comparable sales, particularly those that closed prior to the appraisal date. It may also involve providing permits for recent improvements or detailed information about upgrades.

The ROV request is submitted to the lender, who forwards it to the appraisal management company for the original appraiser’s review. The appraiser reviews the additional information and, if warranted, revises the report. The timeline for an ROV can vary, taking a few days to weeks, and resolution must occur before the loan closes. While not always successful, an ROV provides an avenue to dispute an inaccurate appraisal.

Other Transaction Outcomes

If negotiations or challenging the appraisal do not resolve the discrepancy, other transaction outcomes are possible. The buyer may terminate the purchase agreement, typically permissible if the contract includes an appraisal contingency. This allows the buyer to exit the deal without penalty if the appraisal falls below a certain amount or the purchase price. If terminated under such a contingency, their earnest money deposit, typically 1% to 3% of the purchase price, is usually refunded.

Alternatively, the buyer may walk away from the deal, even without an appraisal contingency, which could result in forfeiture of the earnest money deposit. This usually occurs if the buyer cannot secure financing or is unwilling to cover the appraisal gap with additional cash. Sellers might also terminate the agreement if unwilling to lower the price and the buyer cannot meet the original terms.

Less common are creative financing solutions. A seller might agree to carry a second mortgage for the difference between the appraised value and the sales price, effectively lending to the buyer for that portion. This arrangement usually involves specific terms for interest and repayment. However, this option requires the seller to have financial flexibility and a willingness to take on the risk of a private loan.

Ultimately, the path taken depends on the specific circumstances, the terms of the purchase agreement, and the motivations of both the buyer and the seller. Each party must assess their financial capacity, risk tolerance, and desire to complete the transaction. The decision to proceed, renegotiate, or terminate is important when a home appraisal comes in low.