What to Do if the Appraisal Comes in Low
Once you’ve settled on an asking price, you’ll likely turn your attention to financing your new home. While you may think that the deal is done, keep in mind that the asking price may not always meet the appraised value.
The appraised value is what the mortgage lender is concerned with, as it protects the lender in the event that you default on your loan. After all, why would the lender want to give you anymore money than what your property is actually worth?
That said, it’s not uncommon for an appraised value to fall short of the purchase price. If it happens to you, here are some options to save the deal and close the mortgage.
Renegotiate Purchase Price
If the appraised value comes in lower than the contractual purchase price, you may be able to renegotiate the asking price so that it falls in line with the lender’s assumed value of the home. Here’s the kicker. If you don’t have an appraisal contingency in the purchase contract, you’re obligated to buy the home regardless.
In this case, you’ll need to come in with extra money to make the deal work, which may require putting more money down or taking on a higher interest rate on your loan. You may even need a second mortgage if you had only intended to take out one.
If your purchase contract did come with an appraisal contingency, the buyer will need to work with you to make things right. At this point, the buyer can walk away from the deal and collect their earnest money deposit. But typically the seller will work with the buyer to make good on the deal, though a huge variation in appraised value and purchase price could kill the deal outright.
Either way, the buyer will usually work with the seller if the value comes in far lower than the purchase price, though they aren’t obligated to do so if there isn’t a related contingency. If the seller wants to make the deal work, you may be in luck regardless of what contingencies are in place, it all depends on the unique characteristics in your particular sale.
Modify Financing Terms
If the appraised value comes in slightly lower than expected, it’s not the end of the world. Most buyers put down 20 percent when they purchase a home, so there’s typically a cushion if the value comes in a little short. If this is the case, you can work your loan officer to adjust the loan amount as needed.
Keep in mind that a larger loan amount comes with a higher loan-to-value, which may drive your interest rate higher. Mortgage loans typically get priced in loan-to-value tiers, from 65-70%, 70-75%, 75-80%, and 80% or greater. The higher the tier, the higher the adjustments and the resulting interest rate. And it can vary greatly, so find out exactly where you stand before you commit to the modified terms.
Get a Second Opinion
Not all appraisals are created equal, and the same is true with appraisers. If the value falls short the first time around, try, try again. You can always ask the lender to get a second opinion, or order an enhanced review if you think the value is there. Keep in mind that this can backfire, and the value could come in even lower with a more in-depth review.
If you’re not getting the value you want/need with one lender, you can always take the loan to another lender in the hopes that they’ll come up with something different. Remember, appraising homes is not a perfect science. There will always be variations, and with that comes options.