There is no getting around it: when you purchase a home using a mortgage, you need an appraisal. A home appraisal not only protects the bank from lending out more money than a home is worth, but it also protects the buyer from paying too much for a house.
No matter how beneficial this process is, it can be upsetting when your dream home appraises for less than the purchase price. A low appraisal could mean the end of a deal, but before you throw in the towel, consider these options:
Challenging the Appraisal
If the original appraisal seems off base, it is possible to appeal it, or get a second appraisal. A buyer can likely request that the seller foot the bill on the second appraisal. A NAEBA buyer agent can help negotiate on your behalf in situations like these.
If the home is in a development where dwellings are similar, it’s more likely the valuation will stand, as the “comps” are easy to determine. On the contrary, a custom or historic home may have few, if any, recent comps in the area.
The appraisal document will list the comps used, but it’s possible your local government isn’t making information of new sales immediately public.
Work with a qualified NAEBA real estate agent and loan officer to find the latest comps in your area when challenging an appraisal.
Review the Appraisal in Detail
The appraisal is a detailed document, so study it carefully for any incorrect or missing information.
The appraiser isn’t apt to leave out a bedroom or bathroom, but they may not note any extensive remodeling of the bathroom, kitchen or other parts of the house that may increase value.
Appraisers may not include the correct square footage, the acreage of the property, or leave out a fireplace or other higher-end amenity. A provable error gives you the right to appeal the appraisal.
Ask the Seller to Lower the Sale Price
Once you’ve made an offer to the homeowner, getting them to budge can be difficult, but it’s still worth a shot if you encounter a low appraisal.
If the seller seems open to negotiating the sale price, you and your realtor may be able to work out a new agreement.
Whether or not this option is realistic ultimately depends on how motivated the homeowner is to sell and how wide the gap is between your initial offer and the home’s appraisal value.
Increase Your Down Payment
The reason the appraisal is so important is because it determines what kind of loan-to-value ratio you’ll have. Generally, lenders prefer for this ratio to be in the 80% range, unless you’re trying to get an FHA loan. A third way to work around a low appraisal is to increase the size of your down payment so that you don’t have to borrow as much.
For example, let’s say you’re buying a $200,000 home and you originally planned to put down 20%. The house appraises at $190,000. To keep the loan at an 80% LTV ratio, you could put up the $40,000 you’d originally planned to pay, plus an additional $10,000 to cover the difference between the home’s value and the amount of the loan offer.
A low home appraisal can be disappointing, but it’s not the end of the world. A NAEBA buyer agent can help you identify the best solution for your situation.