If you’re buying a home, you’re not without options if the appraisal comes in low. Find out why appraisals can be low and what you can do if the bank won’t give you a loan for the amount the seller wants.
Why Is a Low Appraisal a Big Deal?
The main problem with a low appraisal is the difference between the seller’s asking price and the newly assigned market value of the home. Lenders will generally only loan you the appraised amount of the property because when the appraiser established that amount, it became the market value of that home. Since lenders give out loans to make money, a loan for more than the property’s market value is not an investment they want to take a chance on. If you default on the loan, they might be able to make up the lost funds. However, if they give you more than a home is worth, there is an increased chance that they will not make up the lost capital.
Why Does a Low Appraisal Happen?
Homes can fail to appraise at the sales price for several reasons. One factor that contributes the most to low appraisals is the housing market.
Market Factors
Artificially inflated prices can result from multiple offers and competitive bids. Homes can decline in value when fewer buyers are shopping among a larger inventory of homes. Market values can rise if there are not enough homes to meet housing demand.
An Inexperienced Appraiser
An inexperienced appraiser who doesn’t understand local influences on value can also be the culprit. While this happens occasionally, it is rare, thanks to internal review processes and rules created under the Home Valuation Code of Conduct (HVCC). The appraiser might have overlooked pending sale data, which could reflect higher comparable sales when they closed, or they might have selected similar sales from the wrong neighborhoods.
Other Factors
The underwriter might have made an incorrect evaluation, or the seller might have overpriced the property. Many times, sellers price their homes based on the price they paid and the sentimental values they place upon them. Whether a lender wants to loan money or not isn’t a factor. Lenders want and need to settle loans. It’s how they make their money. Lenders are also prohibited from redlining, which is the practice of outlining areas on a map where they may not want to make loans.
What To Do About a Low Appraisal
Options for sellers and buyers are different because they’re approaching the problem of a low appraisal with conflicting goals. The seller wants top dollar for the property, while you don’t want to pay too much. You must also deal with a potential lender that will not finance a mortgage for more than or most of what a home is worth.
If the consumer feels they have been a victim of appraisal bias, the consumer can submit a complaint with HUD’s Fair Housing and Equal Opportunity office to get help. The consumer can also contact the Appraisal Subcommittee Appraisal Complaint National Hotline to submit a complaint. Finally, a lender discriminated against you, including by using an improper appraisal, you can submit a complaint to the Consumer Financial Protection Bureau (CFPB).
You Can Make Up the Difference in Cash
You can make up the difference between the appraisal value and the sales price with cash if you have it. The lender only cares about the appraisal to the extent that it affects the loan-to-value ratio, which is how much of the home’s value the mortgage takes up (such as a ratio of 75% or a loan of $75,000 on a $100,000 house). A low appraisal doesn’t mean the lender won’t lend; it just means that it will make a loan based on the ratio agreed upon in the contract at the appraised value.
Reduce the Price
The best solution is often for the seller to reduce the price of the home. More often than not, it makes the buyer happy, and the lender is satisfied. It might also be worth it if the seller needs to close the sale in a buyer’s market. There’s no guarantee the seller won’t receive a low appraisal again if the first buyer walks away. Additionally, an appraisal’s term of validity can last between 120 and 180 days, so a seller might be stuck with a low appraisal for some time unless the housing market shifts.
Dispute the First or Order a Second Appraisal
Request a copy of the appraisal report from the buyer if you’re the seller, then contact the lender and ask about their dispute practices. The appraiser isn’t permitted to speak with the seller directly or to the seller’s agent. Only the lender can insist upon a second appraisal, and typically only you as the buyer can make a request for another, which might or might not be honored. You can offer to split the cost of the second appraisal if you’re the seller.
Provide a List of Comparable Sales
Ask the agents involved to put together a list of recent comparable sales that justify the agreed-upon sale price, then submit that list to the underwriter and ask for a review of the appraisal. Try to use comparisons closer to the subject property than the ones the appraiser used.
Call the Listing Agents of Pending Sales
You’ll have to ask your agents to handle this one, but they can try to learn the actual sales prices of properties that are pending but haven’t closed yet. Listing agents don’t have to disclose sale prices, but many are happy to help out because they could find themselves in the same situation down the road. Your agent can always ask whether the other agent thinks your price will appraise if the agent refuses to divulge the pending price.
Meet in the Middle
Sometimes, sellers will back their price down to keep you from paying the entire difference between the sales price and the appraisal. They might settle somewhere between a full cash contribution and lowering the price.
Cancel the Transaction
Many purchase contracts include loan contingencies, where you can be released from the contract without penalty if you’re unable to get financing. You may not qualify at the agreed-upon terms if the appraisal comes in low, and a properly written loan contingency allows you to cancel the contract under these circumstances. The seller must then release your earnest money deposit. The seller might sell for more by putting the home back on the market and looking for a new buyer. The new appraisal could be very different, provided that the low appraisal wasn’t a Federal Housing Administration (FHA) appraisal. These appraisals are assigned a case number, so the same appraisal would be used if the first and second buyers had FHA appraisals.
