When you and your Realtor wrote your purchase offer for a home, you most likely made your offer contingent on several items, including financing, a home inspection and an appraisal. If your loan is locked in and your prospective home passed its inspection with ease, then you’ve only got one challenge left: the appraisal.
Mortgage lenders require an appraisal on your home before they’ll provide a loan for the simple reason that the property is the underlying asset that serves as collateral for the loan. If for some reason you run into financial difficulties and lose your home to foreclosure, your lender would need to sell the property to repay the loan. A lender will only approve a loan for a property that appraises for the full sales price of the home or more.
Appraisals are a touchy subject for many real estate professionals. There’s no question there have been more complaints about appraisals coming in too low during the years since the housing crisis. A couple of years ago appraisers were contending with few recent sales to compare, along with the issue of how to handle distressed sales. Now that home prices are rising again it can also be tough for an appraiser to measure just how high values have reached. Compounding the problem, new appraisal rules introduced a few years ago mean that some appraisers are working in communities where they’re unfamiliar with things that add to a home’s value, such as the school district, proximity to amenities or other factors.
All of that plus the momentum of a rising market explains why it’s possible that an appraisal could be lower than the price you offered the seller. The way you and the seller and your lender handle a low appraisal depends a lot on the purchase agreement you both signed.
Options After a Low Appraisal
Your contract and your Realtor can guide you to decide how to handle a low appraisal. Your choices include:
- If your contract has an appraisal contingency, you can cancel your offer and have your deposit returned.
- If you still want to buy the home and believe the amount you offered is reasonable, you can make up the difference in cash. The lender cares about the appraisal only to the extent it affects the loan-to-value ratio. A low appraisal does not mean the lender won't lend. It means the lender will make a loan based on the ratio agreed to in the contract at the appraised value.
- If the seller agrees, you can renegotiate the contract. Some sellers won’t negotiate, but others are willing to drop the price or even to provide their own financing for the difference between the contract price and the loan amount.
- If you strongly believe the appraiser has made a mistake in estimating the home’s value, you can pay for a second appraisal (not true for HOA Loans). However, there’s no guarantee that the second appraisal will be any higher.
- You can also challenge the appraisal by having your agent supply a list of comparable sales. Ask the agents involved to put together a list of recent comparable sales that justify the agreed-to sales price. Have your agent submit that list and ask for a review of the appraisal. Also, ask the agents to call the listing agents of pending sales to try to find out the actual sales price of those properties.
Before you commit to buying a house for more than its appraised value, consult with your Realtor and think carefully about the risk you incur by purchasing a property with less equity than expected. If the appraiser is correct, it could take longer than you think to build equity in your new home.
Let the Bandy Team guide you through all phases of the home buying and home selling process in Denver whether you’re searching for a home in the Lowry area of Denver, real estate in Cherry Creek, or any of the other fine communities surrounding Denver. We are here to help you find your dream home. We will be there to help you every step of the way!
Until next time,
Marianne Bandy, Team Leader
The Bandy Team
Keller Williams Park Meadows
720-466-3790
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