When someone is buying a home and theyre going to use financing in the form of a mortgage, they need an appraisal to cement the deal. Before a bank is going to extend credit, they want to make sure theyre not giving someone a loan thats more than the fair market value of the house.
Thats where an appraiser will enter the scene. An appraiser will give their unbiased opinion on the value of the home.
If the appraisal is less than what your offer is, then you may feel frustrated and even a little devastated.
This isnt an uncommon situation, however. One of the big reasons for contingency issues is the appraisal.
An appraisal goes over the condition of a property, and they have to be certified in the state where theyre working. Appraisers look at a wide variety of features like the year the home was built, zoning details for the neighborhood, construction details like the type of foundation, and the utilities and amenities.
An appraiser will come up with a report for the lender in around a week or so, but for VA and FHA loans, the appraisal report can take longer to finish because it has to be more detailed.
There are a lot of reasons an appraisal can come in low. A lack of comps can be one reason. For example, the market might be moving faster than appraisers, so home values in a hot market could be going up rapidly, but appraisals might not be matching that pace. Theres also an issue if for example there have been a lot of remodels in a neighborhood to bring the overall value of the comps up.
So what if your appraisal comes in low? What can you do?
If youre worried a pending sale wont go through, both a buyer and a seller have options.
The buyer might be able to make up for the difference in the appraised value and the sale price using cash.
The reason a lender even cares about the appraisal value is that it impacts the loan-to-value ratio.
In some instances, a lender wont let a buyer make up the difference in cash, so there could be another option here which is a buyer covering some of the closing costs on the sellers end.
The simplest solution, when possible, is to reduce the price if it was priced too high. The lender will be happy, and so will the buyer and then the deal can go through. You have to think that if you let one buyer walk away over the issue, that theres certainly a high likelihood the next buyers lender could have the same issue.
You dont have to accept an initial appraisal. That doesnt mean that your lender wont go with the first one, but its worth a shot to dispute it or to ask for a second one.
You should always ask for a copy of the appraisal report as a seller, so you can go over it and make sure there are no glaring mistakes.
Only a lender can technically demand another appraisal, and they may or may do that, but its worth trying.
You can ask the real estate agents who are working on the deal to create a list of comps that would highlight the justification for the sale price thats been agreed on. Once thats compiled, you can give it to an underwriter and ask them to review the appraisal.
Finally, aside from flat-out canceling the transaction, you might be able to negotiate and come to an agreed-upon middle point. For example, a seller might agree to pay some of the difference between the sale price and the appraisal.
There are options, but you have to find whats going to work for you, and if youre working with a good agent, they should be able to help you find a solution if an appraisal comes in low.
