What If My Appraisal Is Low on a Refinance?

A property appraisal is a professional assessment of a home’s market value, a required step when refinancing a mortgage. It helps the lender confirm the property’s value is sufficient to secure the loan. A low appraisal means the property is valued at less than anticipated, significantly impacting the refinance process. This valuation is distinct from a home inspection, which focuses on physical condition rather than monetary worth.

Understanding a Low Refinance Appraisal

A low refinance appraisal means the appraiser’s estimated market value of the home is less than the loan amount the homeowner is seeking. This impacts the loan-to-value (LTV) ratio, used by lenders to determine eligibility and loan terms. The LTV ratio is calculated by dividing the loan balance by the home’s appraised value. A lower appraised value results in a higher LTV ratio.

A higher LTV ratio can lead to a reduced maximum loan amount, potentially preventing a homeowner from achieving their refinance goals. For instance, if the goal was a cash-out refinance, a lower appraisal could significantly reduce the amount of cash available. An elevated LTV can also result in higher interest rates on the new loan. If the LTV crosses certain thresholds, such as exceeding 80% for a conventional loan, the lender may require private mortgage insurance (PMI), adding to the monthly housing expense. A low appraisal lessens the collateral value in the lender’s view, making them less inclined to lend the full desired amount.

Common Reasons for Low Appraisals

Several factors can contribute to a property appraising low during a refinance. Market conditions are a factor, as a cooling housing market, declining property values, or an oversupply of homes can depress appraised values. Appraisers rely on recent comparable sales, and if “comps” in the local area have sold at lower prices, it can directly influence the property’s valuation.

Property-specific issues can lead to a low appraisal. The home’s condition, including deferred maintenance, outdated features, or structural concerns, might be assessed negatively by an appraiser. Unique property characteristics, such as an unusual layout or those limiting comparable sales, can result in a lower valuation.

Appraiser errors or methodological issues can also occur, despite appraisers being independent professionals following specific guidelines. This can include overlooking relevant comparable sales, making incorrect adjustments for features, or having a conservative valuation approach. Data discrepancies, such as inaccuracies in public records or information provided to the appraiser, can also influence the outcome.

Your Options After a Low Appraisal

Upon receiving a low appraisal, homeowners should meticulously review the full appraisal report. Lenders are legally required to provide a copy of this report. The review should focus on identifying potential errors, omissions, or misinterpretations that could have impacted the valuation. Specific areas to examine include incorrect square footage, miscounted rooms, the use of non-comparable sales, or the appraiser overlooking recent upgrades and unique property features. Compare the comparable sales used by the appraiser to other recently sold, truly similar properties in the immediate vicinity.

If discrepancies or errors are found, homeowners can pursue a formal reconsideration of value (ROV) by contesting the appraisal with the lender. This process requires providing compelling evidence to support a higher valuation. Such evidence might include recent comparable sales not included in the report, documented property improvements with costs, or corrections to factual errors in the appraisal. The lender reviews the request and forwards the supporting information to the appraiser for re-evaluation. The appraiser may then update their original valuation if they agree with the presented evidence.

Should contesting the appraisal not yield the desired result, negotiating with the current lender is an alternative. This involves discussing options such as accepting a lower loan amount than initially sought. Homeowners might also consider bringing additional cash to closing to reduce the loan amount and meet the required LTV ratio. Exploring different loan products or terms offered by the same lender could also be an option.

If the current refinance terms remain unfavorable, exploring alternative solutions is an option. This could involve seeking a second opinion by applying with a different lender, which might necessitate another appraisal, incurring additional costs. Postponing the refinance until market conditions improve or value-adding improvements can be made might also be considered. Improvements such as addressing deferred maintenance, updating outdated features, or enhancing curb appeal can positively influence future appraisals.

Canceling the refinance is always an option if the terms are no longer advantageous due to a low appraisal. While this decision means the refinance will not proceed, it allows the homeowner to avoid unfavorable loan terms. Associated costs, such as the appraisal fee already paid, are non-refundable.