Buying a home is an exciting venture, but a mortgage borrower may have to jump through hoops to make a deal work. Real estate professionals, sellers and buyers can find themselves at odds when the home appraisal fails to support the asking price. Typically conducted after the sales contract is signed, the appraisal can come in thousands of dollars lower than what the seller expects and the buyer is willing to pay, resulting in renegotiation or cancellation of the deal.
A buyer relying on mortgage financing must get a home appraisal. The appraiser is an independent third-party hired for the lender's benefit. The lender relies on the report, which includes an estimated value, to help determine the maximum amount it can lend on the home. As an unbiased opinion of value, the appraisal may differ from the asking price, or contract sales price. Appraised values usually match the asking price or come in lower, but seldom exceed the asking price.
Low appraised values are a common problem in some markets where home sale prices are on the rise, according to the Los Angeles Times. In an effort to prevent property over-valuation, which often leads to losses for lenders and foreclosure, appraisers may take a more conservative approach to values, causing the appraisal to fall short of asking price. Because the lender bases the loan-to-value -- which compares the amount financed to the appraised value -- on the appraisal, the loan amount must be reduced accordingly.
Changes have to be made to the sales contract when a difference arises between the home appraisal and the asking price. Because the lender does not finance more than a percentage of what the home is worth, someone must make up the difference. A buyer can increase his down payment to cover all or a portion of the shortfall. Likewise, the seller can choose to lower his asking price accordingly. Cancellations usually result when neither the buyer nor the seller agree to make up the difference between the appraised value and price.
Additional problems may arise from the appraisal. Often, appraisals fail to meet asking price because the home has serious defects. A property with mechanical, structural or health and safety issues can prevent it from gaining financing altogether. A lender must require repairs for such problems and may also ask for other, less serious defects to be repaired before it makes the loan. Common issues that can hurt a home's value include: termite infestation, cracked foundation, roof leaks, faulty plumbing and electricity, the presence of lead-based paint and excessive dampness.
- Los Angeles Times: Low Appraisals That Don't Reflect Rising Markets are Ruining Deals
- Rocket Mortgage. “Refinance Appraisal vs. Purchase Appraisal.” Accessed June 8, 2020.
- Rocket Mortgage. “Home Appraisal: What Is It, And What Does It Cost?” Accessed June 8, 2020.
- Appraisal Institute. "Frequently Asked Questions," Page 1. Accessed June 8, 2020.
- Fannie Mae. "Uniform Residential Appraisal Report (Form 1004)." Page 4. Accessed June 8, 2020.
- HUD.gov. “Streamline Your FHA Mortgage.” Accessed June 8, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.