What If a Home Appraisal Is Lower Than the Offer?

A home appraisal is a professional assessment determining a property’s market value. This evaluation is a standard and often required step in real estate transactions, particularly when a mortgage lender is involved. Its primary purpose is to assure the lender that the amount they are financing is consistent with the home’s actual value, thereby protecting their investment.

An independent licensed appraiser conducts a thorough review of the property, considering its characteristics and comparing it to recently sold, similar homes in the vicinity. Occasionally, the appraised value may come in lower than the agreed-upon offer price, complicating the transaction.

Immediate Implications for the Transaction

A home appraisal coming in lower than the agreed-upon offer price can significantly impact a real estate transaction. This discrepancy creates what is often referred to as an “appraisal gap.” The most direct consequence of a low appraisal falls on the buyer’s mortgage loan.

Mortgage lenders base the maximum loan amount they are willing to provide on the appraised value of the home, not the purchase price. Lenders do this because the home serves as collateral, ensuring they do not lend more than its worth. A lower appraisal means the lender will reduce the amount they are willing to finance, directly affecting the buyer’s loan-to-value (LTV) ratio. The LTV ratio divides the loan amount by the appraised value, and lenders maintain specific thresholds.

If the appraisal is low, the buyer’s intended loan amount might exceed the lender’s LTV limits, necessitating adjustments. This often requires the buyer to secure additional funds to bridge the gap. Without these additional funds or a renegotiation, the financing contingency in the purchase agreement could be jeopardized, potentially leading to the deal falling through. A low appraisal can create immediate financial strain and uncertainty for both parties involved.

Buyer’s Course of Action

When a low appraisal occurs, buyers have several actions. One approach is for the buyer to pay the difference in cash. This bridges the “appraisal gap” and allows the transaction to proceed, satisfying the lender’s loan-to-value requirements. Buyers can reallocate funds intended for a larger down payment to cover this gap, though this might result in a lower down payment percentage and potentially require private mortgage insurance (PMI) if the LTV exceeds 80%.

Another common action is to renegotiate the purchase price with the seller. The buyer can request that the seller lower the price to match the appraised value or meet somewhere in the middle. This negotiation aims to find a mutually agreeable price that aligns with the lender’s valuation, reducing the amount the buyer needs to bring to closing. This approach often involves amending the original purchase agreement.

Buyers can also attempt to contest the appraisal report with the lender. This process involves submitting evidence to the lender that the appraiser may have overlooked or made factual errors. Such evidence might include more recent comparable sales (comps) in the area or corrections to property characteristics that could impact value. However, successfully challenging an appraisal can be difficult and is not always guaranteed, as appraisers are independent licensed professionals.

Finally, if the appraisal contingency clause is included in the purchase agreement, the buyer may have the option to walk away from the deal. This clause allows the buyer to terminate the contract without penalty and recover their earnest money deposit if the home does not appraise for the agreed-upon price. This protects the buyer from overpaying or being forced into a financially untenable situation.

Seller’s Course of Action

Sellers also have actions they can take when faced with a low appraisal, each with different financial implications. One option for the seller is to lower the sale price to match the appraised value. This adjustment addresses the appraisal gap, allowing the buyer’s financing to proceed based on the new, lower price. While this means the seller receives less cash at closing than initially anticipated, it can keep the deal alive and prevent the home from going back on the market.

Another strategy is for the seller to offer a credit or concession to the buyer. Instead of reducing the sale price, the seller might agree to pay a portion of the buyer’s closing costs. This provides financial assistance to the buyer, helping them cover some of the appraisal gap or other upfront expenses, without altering the home’s sale price on paper. Such concessions are documented as an addendum to the purchase agreement.

Conversely, a seller can insist on the original purchase price. They are not obligated to lower their price or offer concessions just because the appraisal came in low. If the seller holds firm, the buyer is solely responsible for covering the entire appraisal gap in cash or finding an alternative financing solution. This stance carries the risk that the buyer may choose to walk away from the transaction, especially if an appraisal contingency is in place.

In some instances, a seller might request or pay for a second appraisal. While lenders order appraisals, a seller might believe the initial appraisal was flawed or did not consider all relevant factors. Lenders are not obligated to accept a second appraisal. If they do, they select the most reliable and accurate report, not just the one with the highest value. This option is less common and depends on the specific circumstances and lender policies.

Reaching a Resolution

When a home appraisal comes in lower than the offer, the situation initiates a negotiation process between the buyer and seller. This negotiation is facilitated by their real estate agents, aiming to find a mutually acceptable solution. The goal is to bridge the appraisal gap, the difference between the agreed-upon purchase price and the lower appraised value.

The appraisal contingency clause in the purchase agreement heavily influences the negotiation and potential outcomes. This clause provides the buyer with the contractual right to renegotiate the price or withdraw from the deal without losing their earnest money if the appraisal is insufficient. If no such contingency exists, or if it was waived, the buyer might risk losing their earnest money deposit if they choose to terminate the contract.

Possible resolutions stemming from these negotiations include the buyer agreeing to pay the entire appraisal gap in cash, the seller agreeing to lower the price to the appraised value, or a compromise where both parties share the financial burden. For example, the buyer might increase their down payment by a certain amount, and the seller might reduce the sale price by another amount. The outcome depends on factors such as market conditions, the motivations of both parties, and the size of the appraisal gap.

If a resolution is successfully reached, an amendment to the purchase agreement is drafted and signed, reflecting the new terms. If, however, the buyer and seller cannot agree on a path forward, and an appraisal contingency permits, the deal may fall through, and the property will return to the market. In such cases, the buyer moves on to search for another home, and the seller must relist the property, potentially at a revised price.