As the home buying/selling process gets down to the final stages, the deal hangs on a few key elements: a clean home inspection, final approval of financing, securing homeowner’s insurance, and a home appraisal that comes in at or above the selling price.
What happens if a home appraisal is too low? Since this is one of the final steps in the closing process, it’s not easy to walk away from the deal. Fortunately, a low home appraisal doesn’t mean all is lost, but the home buyers and sellers do need to figure out how to handle the issue before the deal can go through.
What Is a Home Appraisal?
A home appraisal is an independent assessment of a home’s current market value. Appraisals are conducted by licensed professionals on behalf of the lender. The purpose of the appraisal is to make sure that the home is worth what the buyer is paying for it and to confirm that the loan amount is appropriate given the home’s condition, location, size, features, and recent comparables.
What Is a Home Appraisal That Comes in Low?
A low home appraisal is one that comes in below the purchase price of the home. This could create a financing gap, depending on the type of loan you’re applying for and the amount of your down payment.
Why Does a Low Home Appraisal Happen?
A low home appraisal could happen for a few reasons:
- Rapidly rising prices: Appraisers have to use closed sales as comparables (not pending or active listings), so appraisals might lag behind the current market. If the market is very hot, current prices might outpace homes that sold as little as a few months ago.
- Limited comparables: If good comparables are lacking, as might be the case in a rural area or with a home that has unusual features, the valuation of the property might be off.
- Overpricing, bidding wars, or emotional buying: In all these situations, the buyer might overpay for the property. If that happens, the appraisal could come in low.
- Property condition issues: If the appraiser identifies significant problems with the property and the price wasn’t adjusted to reflect them, the appraiser will adjust the value downward.
- Appraiser error: Appraisers don’t always get it right. They might miss valuable upgrades, mismeasure the home, use outdated comps, or overlook key features that add to the value of the home, such as energy-efficient upgrades, finished attics or basements, or proximity to parks.
A low home appraisal isn’t always the final word; under certain circumstances, they can be adjusted to reflect the home’s true market value.
What Happens for Buyers with a Low Home Appraisal?
When you’re buying a home and the home appraisal comes in low, you could have problems getting the loan approved. Lenders will only finance the lower of the purchase price or the appraised value. For example, if you agree to pay $400,000 for a home but it’s appraised at $380,000, the lender will only finance $380,000.
Buyers with a low home appraisal have a few options:
- Covering the gap with a larger down payment.
- Backing out of the deal if they have an appraisal contingency.
- Renegotiating the purchase price with the seller.
- Challenging the appraisal if they believe there are mistakes in the report or things that were overlooked.
- Requesting another appraisal.
Making a decision in consultation with your real estate agent is the best approach in this situation.
What Happens for Sellers with a Low Home Appraisal
If you’re selling a house and the appraisal comes in low, you face the possibility of the deal falling through. Options for sellers are:
- Reducing the price of the property, which saves you from having to re-list your home and wait for new buyers.
- Waiting for market conditions to change so that your home appraises at a higher value.
- Sticking with the list price, which risks future potential buyers referencing the low home appraisal.
- Looking for a cash buyer or one with a large down payment so that the appraisal doesn’t affect the loan approval.
Like buyers, sellers can also challenge an appraisal if they think the appraiser made a mistake.
How to Challenge a Low Home Appraisal
Either the buyer or the seller can challenge a low home appraisal through a process called Reconsideration of Value (ROV). The party requesting the ROV can point out errors such as:
- Incorrect square footage or lot size.
- Missed improvement to the home, such as upgraded electrical or plumbing, or a new HVAC system.
- A legal in-law suite or apartment.
- Incorrect number of bedrooms or bathrooms.
- Inappropriate comparables.
They can also provide better comparables if they think the appraiser used the wrong ones.
The documentation goes to the lender, who submits it to the appraisal company. The appraiser might revise the value, stick with the original, or offer a rebuttal with more information. FHA and VA loans have a more structured appeals process than other types of loans, making it easier for these applicants to challenge an appraisal.
What Happens If a Home Equity Loan Appraisal is Too Low?
If your appraisal is for a home equity loan or home equity line of credit (HELOC), it will affect the amount you can borrow. A low home appraisal in this case won’t sink your financing, but you may not be able to borrow as much as you wanted to.
Lenders will typically allow you to borrow 80 – 85% of the appraised value of your home minus what you still owe on it. For example, if your home is appraised at $800,000 and you have an outstanding mortgage of $400,000, the maximum amount that you’ll be able to borrow against the property would be between $320,000 and $340,000.
You have a few options if your home equity appraisal comes in low:
- Challenge the appraisal.
- Apply for a smaller loan.
- Try a different lender.
- Make improvements to the home before getting an appraisal.
- Wait until the market improves and try applying for financing again.
Home Appraisals and Refinancing
If you’re refinancing to get better terms or to eliminate private mortgage insurance (PMI), lenders usually want to see that you have 20% equity in your home. A low home appraisal may stand in your way, but you have the same options as people getting appraisals for other reasons: challenge the appraisal on the grounds that there are errors, try different lenders, make improvements to the home, or wait until the market improves.
Dealing with a Low Home Appraisal
A low appraisal can feel like a setback, but it can provide you with valuable information. For buyers, a low appraisal protects you from overpaying for a property. For sellers, it serves as feedback on your pricing expectations. For homeowners looking for equity loans or refinancing, it might be the reality check that gets you back on track.
Although it can be disappointing, try to approach a low home appraisal strategically rather than emotionally; evaluate your options and make a decision in consultation with knowledgeable professionals like your financial planner and your real estate agent. Often, solutions and compromises are possible, although it’s sometimes the smartest move to walk away.
