What Happens if a Home Appraisal Value Comes In Low?

Property market values and lenders bidding

If you are bidding to purchase a home and the lender’s appraisal value is lower than your bid value—the lender will not approve the mortgage loan even if you are eligible. Therefore, you may need to provide additional cash to begin the home purchase process.

How the Home Appraisal Process Works

A house appraisal is an analysis that determines the market value of a house. It is administered by a professional appraiser selected by the lender but typically paid by you (the buyer). The appraisal considers the peculiarities as well as the conditions of the property. It also includes the sales price or “comps” of similar properties recently sold in the local real estate market. 

The mortgage banks require appraisals of all loans they issue as part of the loan approval process. This estimation protects the lender in the event of a default by the borrower. Additionally, it ensures that the lender can recover the loan amount through foreclosure, seizure, and resale at the market price. The home appraised value is also used to determine the size of your equity when requesting a home equity loan. You can also calculate your home equity by subtracting the outstanding mortgage balance from the property’s appraised value.

The maximum amount a financier can pay for a mortgage is typically the home’s estimated value minus your down payment. Traditional home mortgages sometimes require a down payment of 20% of the house purchase price. However, a down payment of 10% or less may be accepted depending upon the mortgage type and the borrower’s credit history.

If the appraisal sets the house value at less than the quoted amount, you will not acquire a loan that covers the quoted amount— although you deposited 20% of the offer price, and your pre-approved lending institution will pay that cost.

You May Need Extra Cash if the Home Appraisal Is Low

Rising prices and a highly competitive estate market, as observed in most parts of the U.S., can cause property appraisals to exceed the offered prices. Buyers who bid on disputed houses ventured much higher than the seller’s quoted price, sometimes greater than the house’s appraised value.

Options while bidding for apparisal value

You have several options when you outbid your property appraised value:

i) Accept the financing deal

You can accept the offer based on its estimated value. Also, you might pay the dealer enough money to cover the bid price.

ii) Withdraw your purchase deal

Depending on the nature of the offer letter and whether regional law considers you “sign a contract” to buy a house at the appraisal time. Withdrawing the offer may result in the loss of some or all of the initial deposit (also known as security deposit) you submit with a proposal. In many (but not all) real estate markets, it is common practice to include a check for 1-2% of the quoted price in the offer letter. This money will be considered part of your initial payment or down payment. Nonetheless, it may be subject to forfeiture if you cancel the offer according to local laws and the language of the offer letter or sales contract. Guidance from the real estate attorney would help in this situation.

iii) Negotiate with the agent

In light of the home appraisal, the dealer may agree to a lower auction price. It may be a viable strategy in the colder real estate market. But it is riskier when sellers evaluate the multiple purchase offers. 

iv) Rebut the appraisal

In some places, the law allows you to hire your appraiser to challenge the findings of the lending company’s appraiser. You can do this by considering the broader range of comparable properties than the lender’s appraiser or making a case for additional costs based on market-specific facilities (outbuildings, indoor swimming pools, saunas, etc.). This can be an expensive process, and the barriers to successful refutation are high. In a popular real estate market where sellers have multiple listings to decide, they are likely to transfer to another buyer than waiting for the problem to be resolved.

How an Appraisal Contingency Protects You

The appraisal contingency is a clause included in the offer letter or sales contract. It allows you to withdraw the purchase offer based on the appraisal result.  

The appraisal contingency is an essential measure for the protection of home buyers, typical in real estate contracts languages. In today’s highly competitive market conditions, some buyers are abandoning conditional ratings to make their offers more appealing to sellers. This approach can distinguish one quotation from other offers provided by lenders. However, it is risky if you are unsure whether you have enough cash to make up the difference between the quotation and appraised value.

For many reasons, the lender’s score may be lower than your purchase offer. So, it is worthwhile to predict the opportunity and its possible impacts. After that, take action to protect your funds and plan to buy your next home.