What Happens if a Home Appraisal Comes In Low?

Happy expectant couple outside their new home

If you've made an offer on a home and your lender's appraisal values the property at less than you've bid, the lender won't approve the full mortgage amount even if you qualify for it. In order for the purchase to go through, you may need to supply extra cash.

How the Appraisal Process Works

A home appraisal is an analysis that ascertains a home's market value. It is conducted by a professional appraiser who is chosen by the lender, but typically paid by you, the buyer. An appraisal considers the attributes and condition of the property and the sale prices of comparable properties, or "comps," recently sold in the local housing market.

Mortgage lenders require appraisals as part of the approval process on all loans they issue. This protects lenders in case the borrower fails to repay the loan by providing reassurance that the loan amount can be recouped by foreclosing on the property—taking it back from the borrower and reselling it at market price. The appraised price is also used to determine the amount of equity you have in your home if you seek a home equity loan or home equity line of credit: You calculate your equity by subtracting the outstanding balance on your mortgage from the home's appraised value.

The maximum amount a lender will issue on a mortgage is typically the appraised value of the home minus your down payment. Conventional mortgage loans sometimes require a down payment of 20% of the purchase price but, depending on your credit and the type of loan, down payments of 10% or even less may be acceptable.

If the appraisal sets the home value at less than your offer amount, however, you won't get a loan that covers your offer price—even if you can put down 20% of the offer price and the lender has preapproved you for a loan that covers that amount.

You May Need Extra Cash if the Appraisal Is Low

An appraisal can come in below the offer amount for a variety of reasons. Neighborhood housing prices may be on the decline, for instance, or the appraiser might determine that the home needs major repairs that aren't reflected in the asking price.

Rising prices and tight, competitive housing markets such as those seen across much of the U.S. over the past year also can cause appraised home values to fall short of offer prices: Buyers in bidding wars over hotly contested homes often make offers much greater than sellers' asking prices, and sometimes offers are so high that they exceed the home's appraised value.

If you outbid your home's appraised value, you have several options:

  • Accept the loan offer. You can accept the offer based on the appraised value and then pay the seller enough cash to meet the offer price.
  • Withdraw your purchase offer. Depending on the nature of your offer letter and whether local laws consider you "under contract" to buy the home at the time of the appraisal, withdrawing an offer could mean forfeiting some or all of any good-faith deposit (also known as earnest money) you submit with the offer. Including a check for 1% to 2% of the offer price with an offer letter is common in many (but not all) housing markets. This money is treated as a portion of your down payment but may be subject to forfeiture if the offer is withdrawn, depending on applicable local laws and the language of the offer letter or sales contract. (In some states, the offer letter is a sales contract, which becomes binding as soon as the seller signs it; the offer letter and contract are separate documents in other jurisdictions, and the obligations associated with each depend on local laws.) Guidance from a real estate attorney could be helpful in this scenario.
  • Negotiate with the seller. In light of the appraisal, you may get the seller to agree to a lower sale price. This is a viable strategy in cooler housing markets, but it's riskier in situations where sellers are sorting through multiple purchase offers.
  • Rebut the appraisal. In some locales, the law allows you to hire an appraiser of your own to challenge the findings of the lender's appraiser. They might do so by considering a wider range of comparable properties than the lender's appraiser did, or by making a case for adding value based on amenities that are unique in the market (outbuildings, indoor pool, sauna and the like). This can be a costly process, and the bar for successful rebuttal is high. Also, in a hot real estate market, in which the seller has multiple offers to choose from, they'll likely just move on to another buyer rather than await the outcome of a challenge.

How an Appraisal Contingency Protects You

An appraisal contingency is a clause in the offer letter or sales contract that allows you to withdraw your purchase offer in light of the appraisal results. In locations where earnest money otherwise may be forfeited for withdrawal of a purchase offer, an appraisal contingency can protect you from the loss of those funds.

Appraisal contingencies are fairly standard buyer-protection measures, common in boilerplate real estate contract language. In today's highly competitive real estate climate, some buyers are explicitly waiving appraisal contingencies as a tactic to make their offers more attractive to sellers. This approach can make an offer stand out among multiple bids, but it's risky unless you are certain you have the cash on hand to make up any difference between the property's appraised value and your offer price.

A lender's appraisal can come back below your purchase offer for lots of reasons, so it pays to anticipate that possibility and its implications, and to respond in a way that protects your money and your plans for buying your next home.

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