When an appraiser evaluates the home you're thinking of buying, he looks at many different factors to come up with his opinion of value. Because he's not supposed to be influenced by the price you agree to pay or the seller's asking price, he may look at that house differently and arrive at a lower price. When this happens, it can be very hard to keep the deal moving forward, since it usually means you won't be getting as much money from your loan as you expected.
Understanding the Problem
When a house appraises for less than the contract price, carefully consider your offer. Sometimes, the appraiser may be overly conservative and her price isn't an accurate reflection of what the house is worth, but sometimes she's right. Most lenders lend up to a specified percentage of the house's appraised value. If the appraised value is less, the loan is less. For example, if you are planning to buy a $200,000 house with 20 percent down, you would put $40,000 down and borrow $160,000 from the bank. If the house only appraised for $190,000, the bank would only lend $152,000, leaving you to come up with $48,000 down.
Read Your Contract
Your purchase agreement may contain language that specifies what to do in the event of an appraisal shortfall. It could give you the opportunity as the buyer to cancel the transaction. Some contracts also specify that the seller may have to take back a second mortgage to help insulate you against any reduction in your loan amount, a move that -- in effect -- makes the seller an investor in the house he's selling. If you have a remedy in your contract, it's usually best to start by going after that remedy instead of doing something else. However if your contract doesn't have an appraisal contingency, you'll probably need to negotiate something out with the seller.
The seller can reduce the price down from the asking price. Sellers usually don't like this option and will only do it if they are under pressure to sell. The other option is for the seller to carry a second mortgage for the shortfall. In the example of the $200,000 house that appraised for $190,000, the seller could carry an $8,000 second mortgage so that you could still buy the $40,000 down. A sellers may be willing to do this, but if insufficient money is coming out of the transaction for them, they might be unable to. In addition, you will need to check with your lender to make sure that it will allow second mortgages to be placed on the property.
If you have a shortfall and the seller won't or can't help you out, you have two choices. The first is to walk away from the transaction, which you should be able to do without sanction either due to your appraisal contingency or due to your inability to get a loan that satisfies the terms of your financing contingency. The other option is to put more money down on the property.
Managing the Appraisal Process
Before the appraiser comes out, have either the seller's agent or the buyer's agent supply comps and information on the property to the appraiser so that she can both understand the strong points of the market as well as understand all of the added-value features of the property. These comps can help to round out the picture of what the appraiser sees when she does her own comp research. Making sure that she doesn't miss anything positive is a great way to ensure that she gives the property all of the value to which it is entitled. There's a fine line to walk, though. You want to be helpful, but if you follow the appraiser around pestering her to give you a really good value, it could backfire on you.
- Realtor.com: The Appraisal Contingency
- CNN Money: Low-Ball Appraisal: Mortgage Denied
- Wall Street Journal: Fighting Back Against Lowball Home Appraisals
- Fannie Mae. "Appraisal Waivers Fact Sheet," Accessed Nov. 4, 2019.
- American Family Insurance. "Home Inspection and Appraisal Process," Accessed Nov. 4, 2019.
- Rocket Mortgage. "The Home Appraisal: What Sellers and Buyers Should Know," Accessed Nov. 4, 2019.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.