Whether you’re a home buyer or seller, there’s almost always a lingering fear once contracts have been signed: what happens if the appraisal comes back low? There are options for both parties, but how you handle them may depend on individual situations AND the local factors that may have contributed to the appraised value.
We see this situation crop up in all sorts of market situations, but when there’s a lot of competition for relatively few homes, as we’re seeing in Apex, NC and many other areas of the still-rapidly-expanding Triangle right now, it’s more likely to be an issue.
In multiple offer scenarios (a.k.a. bidding wars)—so common in a seller’s market — emotions can start influencing decisions, and drive up offers. If you’re paying cash for a home, then the price you pay is entirely up to you. If you’re getting a mortgage, however, the loan you get will be based on the appraised value.
How does the appraised value get determined?
The proposed buyer’s mortgage lender sends out a trained and certified appraiser—usually someone familiar with the local area—to assess the property. Naturally the appraiser is looking at the condition of the home, the amenities and land. They’ll also be evaluating:
- Comparable home prices
- Market trends in the immediate area
- Pending sales in the immediate area
- Any short sales and/or foreclosures that may be skewing local data
- The current market (maybe there just aren’t as many buyers shopping)
What can cause a low appraisal?
A number of factors may be at play if the home appraisal comes back low—with “low” occasionally being more about the offer than reality. Among the factors leading the way:
- Competition drove offers above recent prices for comparable homes
- There haven’t been many truly comparable homes in the most comparable local neighborhood or market
- There’s a declining market value in the immediate area
- There was an incorrect evaluation by the appraiser
Buyers and sellers who want a home to appraise for a higher amount may blame an appraiser (and sometimes they may be right), but often there are valid factors influencing the decision. Lenders, after all, want to lend money; they’re generally not trying to lowball any property.
And lenders are also, fundamentally, risk managers; they’re in the business of assessing how the market is trending, and how both home and buyer will hold up over time. Plus, they look at mountains of data, year after year. So, if making a wise investment is part of your goal as a buyer, listening to their input may be smart.
What happens if the appraisal comes back low?
- If you’re the buyer, you’ll need to decide if you can—and want to—make up the difference between your offer and the amount of the loan. You could pay it in cash, or shift some down payment money to pay the difference. (If your down payment drops below 20% of the loan, you’ll need to pay PMI, Private Mortgage Insurance until your home equity reaches 20%.) *Note that there may be situations in which the lender won’t let you—this is something you’ll want to dive into with your mortgage broker (and another reason it’s so important to choose someone you trust).
- If you’re the seller, and you really want to close the deal, you can lower the price.
Either of you can also dispute the appraisal. Each lender will have its own process, but in most cases, you can work with your realtor to assemble comparable recent and even pending sales information, to help build a case for a higher appraisal.
Will you be held to your contract if the appraisal is lower than the offer?
Most contracts include a loan contingency that allows the buyer to back out if they can’t get the loan. The seller should also return the earnest money deposit. Ensuring the contract gives buyers these contract escapes is another benefit of working with an experienced realtor.
In the end, our goal is to help you avoid any situation where you have to ask us “what happens if the appraisal comes back low?” It’s not a situation most of us want to be in, and we work hard to help our buyers and sellers avoid it! Having an experienced agent can make a world of difference, ensuring you successfully navigate competitive home buying and selling situations for the best possible outcome. If we can help you, please just give us a call.