The home appraisal is an integral part of the home buying process. There’s a lot riding on this one document and if it comes in low, it could blow the entire deal.
Lenders depend on third-party appraisals to ensure they’re not lending more than the home is worth. While a low home appraisal can make or break any deal, they’re most likely to throw off a purchase with a low down payment.
Through programs like the Federal Housing Administration, borrowers can buy a home with as little as 3.5 percent down. For illustration purposes, let’s say you’ve agreed to buy a home for $300,000 with 3.5 percent, or $10,500, down before closing costs. That means the lender has agreed to finance the remaining 96.5 percent, or $289,500.
Both you and the seller agree the home is worth $300,000 and are ready to move forward. But what happens if the appraisal comes back at $290,000? The lender is still willing to finance 96.5 percent, but now that equates to $279,850. When you add back in your $10,500 down payment, the most you can afford to pay for the home is $290,350. That’s a far cry from the originally agreed upon $300,000. This is bad news for both the buyer and the seller. So what can you do?
Here are a few tips for when the appraisal comes in low:
Don’t freak out: You’re already an emotional wreck after spending months housing hunting, but now is not the time to lose it. Keep calm and discuss you options with your real estate agent and the seller’s real estate agent to see if you can find a creative way to save the deal.
Put more money down: One seemingly easy fix is to put more money down, but how will you come up with another $10,000 to fill the gap? You’ve already saved for years to get where you are. Can you ask a family member for a short-term loan? If you do, make sure the payment terms and interest rate of a family loan is spelled out and both parties know exactly what to expect. Or if your credit is good, and your debt-to-income ratio is low, it may be best to consider a second mortgage or a uncollateralized personal loan to fill the gap.
Renegotiate the price: Depending on how eager the seller is to sell the property, it may be worthwhile to renegotiate the price. Maybe you can even meet in the middle with more money down and a reduced selling price. This can be a win-win for all parties involved as the seller won’t have to look for a new buyer and the buyer will get the home they want for less.
Start from scratch: Then again, maybe the low appraisal is a sign that you should keep looking. It may be time to start the home search over. Consider why the appraisal came in low. Does the home need extra work that you maybe couldn’t afford anyway? Or are property values in that neighborhood declining? Sometimes it’s best to take a step back and look at the bigger picture.
Challenge the appraisal: This is kind of a last ditch effort and can only be initiated by the lender. The first step is to obtain a copy of the appraisal, which the lender is required to provide upon request. Go through the appraisal thoroughly to be sure the appraiser didn’t miss anything important. Most lenders will not conduct a second appraisal, as they consider it to be “fishing for value,” but you may be able to make a case to have it amended.
An experienced real estate agent is typically trained in the art of valuing real estate, but many factors, even those unseen by the naked eye, can impact a home’s value. A low appraisal can keep you from over paying for a home.