Whether you like it or not, any home being purchased or refinanced with a home loan needs an appraisal. Lenders require appraisals to ensure the value of the home isn’t less than the loan amount and that their risk level is in check.
But every once in a while, especially in competitive markets where multiple offers elevate the price a home, these appraisals can hit a snag and come in lower than the previously agreed upon sale price.
For the buyer, this can be a good thing, giving you more bargaining power. Until you find out the low appraisal has prompted your lender to refuse to finance the loan.
Why do low appraisals happen? There are a number of reasons:
- Multiple offers: In a hot real estate market, multiple offers can artificially inflate real estate prices.
- Declining values: When real estate values decline, homeowners don’t want to admit that their prized possession has dropped in value and are likely to price their home above market.
- Nearby foreclosures: A slew of nearby short sales or foreclosure can make the comps (comparable homes) in the neighborhood you’re shopping in appear lower. This can hurt the home’s value temporarily.
But a low appraisal doesn’t have to be a deal killer. So, what can a home buyer do? If you’re ready to fight, an experienced real estate agent and a little research can save the day.
Here are a few tips on what to do about a low appraisal:
- Stay calm: Buying, selling or refinancing a house is an emotional experience. When you hit a snag along the way, it’s imperative to stay calm and collected and not make any hasty decisions. Discuss what you can do with your real estate agent and set a clearly defined path.
- Increase your down payment: If you have access to more cash and truly believe the price you offered is the real market value of the home, increasing your down payment at closing can ease the lender’s concerns. As long as the loan to value is within the lender’s limits, all should be well.
- Negotiate a lower price: While this option may seem farfetched, a price reduction may be just the ticket to a quick sale. In order to avoid the deal falling through, you could try to negotiate down to the appraised value, and while the seller would end up leaving money on the table, going through the entire sale and escrow process again can take months.
- Meet in the middle: A combination of the above two options, negotiating a lower price and offering to increase your down payment, can be a win-win for both parties. Assuming both parties still want to move forward with the sale, splitting the difference could be the most equitable way to close the deal. For example, if the appraisal comes in $15,000 below the sale price, the seller could cut $7,500 from the price and the buyer could add $7,500 to their down payment at closing.
- Challenge the appraisal: While challenging an appraisal can be a bit of a long shot because only your lender can request a redo, it’s always good to explore. First you should ask for a copy of the report. Lenders are required to provide copies of the appraisal to the borrower within 30 days of closing. Look for factors the appraisal may have missed, such as recent renovations or major structural repairs. Most lenders have a procedure for appealing an appraisal. With the buyer’s permission, contact the lender and make your case. You could even ask the lender to conduct a second appraisal for comparison, but you may have to foot the bill for this, usually around $500. Note: Many lenders don’t allow second appraisals as they consider them to be “fishing for value.”
- Start over: In the event of a low appraisal, as the buyer, you can always cancel the sell and start from scratch. This can be a long, time-consuming process, but it may be the best way to rebound. The both the buyer and the seller are fully within their rights to cancel the contract when the appraisal comes in low.
- Improve your odds: The best way to rebound from a low appraisal is to avoid it entirely. I know, that’s easier said than done, but there are a few steps you could follow to help ensure the appraisal comes out in your favor. For starters, insist that the appraiser be local to your area. Out of town appraisers can spell trouble in some situations. It’s also a good idea for the real estate agents to be present when the appraiser is at the home to answer any questions they may have.
There is hope when you’re hit with a low appraisal, and knowing the process and how to work with the lender can save you time and money.
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