What’s to do if your home appraisal isn’t what you expected.

The process of buying a home has a lot of different steps. It can feel like a juggling act, trying to maintain momentum and make sure every piece of the process comes together. Appraisals can be especially nerve-wracking given how they can affect your mortgage and whether the sale is completed or falls through. We’ll help you understand the impact of a low appraisal and discuss your options if your home or the home you’re buying receives a low appraisal. We’ll also cover scenarios that occur when an appraisal comes in low, and provide tips for buyers and sellers to navigate this situation. Let’s start by breaking down what a low appraisal means.

What Does A Low Appraisal Mean?

A “house appraises low” if the value assessed by the home appraiser is lower than the purchase price agreed to between the buyer and seller. The appraisal provides a snapshot of the appraiser’s opinion of the current market valu e based on similar closed sales in the area. When the appraised value comes in below the contract price, it limits the amount a lender will finance because they base the loan on the appraisal. A low appraisal might delay or even derail your closing. While this sounds scary, it’s important to keep in mind that your real estate agent can help you manage the appraisal process and keep your sale or purchase on track to closing.

How Do Appraisals Work?

Before finalizing a new mortgage or refinancing, a bank will order a home appraisal to determine the value of the property. An appraiser then evaluates the property and looks at comparable sales in your area Then, the appraiser prepares a report which contains their expert view on the value of the property.

The appraised value can come in higher or lower than the home’s price. It’s when it comes in low that it can become a problem. Mortgage lenders will not lend above the appraisal price in a home sale. They want to be sure in the case of a default that the home can be sold for enough to allow them to recoup their loss on the loan.

What Causes Low Appraisals?

When a low appraisal occurs, it’s important to ask what information was used to determine that value. It’s important to confirm that the most recent information on comparable properties was used. This is especially true in competitive markets, since homes can regularly sell over asking price. Keep in mind that the appraiser can only use sales that have closed, and that they should choose comparables that are as similar in gross living area, bedroom/bathroom count, and location as possible.

An appraisal could also come back low if an appraiser leaves out information on significant home improvements or cannot find adequate comparables in the area.

How Often Do Home Appraisals Come In Low?

According to a survey done by the National Association of REALTORs^® in 2021, 11% of sales contracts were terminated due to appraisal problems, and 22% of contracts were delayed due to appraisals. Still, that means most of the time the sales complete without any problems.

Your real estate agent can help you avoid appraisal problems by having comps at the ready to show the appraiser preparing your appraisal report.

What Are Some Common Appraisal Problems?

Low appraisals can be a problem in neighborhoods with homes that are rapidly appreciating. That’s because homes in overheated real estate markets have appreciated in value so rapidly that comps might not reflect the prices sellers are currently being offered.

Another common appraisal problem occurs in rural areas, where homes and properties can’t easily be compared to one another.

There are many factors that can hurt a home appraisal, such as the home being in a specific neighborhood, school district and varying market conditions.

Know that, if your appraisal comes back low and you think it’s inaccurate, there are ways you can appeal.

What Happens If The Appraisal Is Lower Than The Purchase Price?

If an appraisal comes in lower than the purchase price when a property is being bought, it can be bad news for the buyer and the seller. When an appraisal comes in low, the buyer’s mortgage lender will not lend more than the appraised value.

Another part of why lenders do not exceed the appraised value has to do with loan guidelines. Lenders use the appraised value to calculate your loan-to-value (LTV) ratio. Here’s an example of how this can play out:

Say you’re using a conventional loan to pay for a $200,000 house. The maximum LTV for this loan is 97%, or $194,000. If the home appraises

What Happens If I Get A Low Appraisal When I’m Refinancing My Home Loan?

Generally speaking, this scenario happens less often than when a lender is assessing the home for a purchase. In the refinance process, the lender is more concerned with how much equity you have in the home and your record of making monthly mortgage payments on time and in full.