From Paying Up to Walking Away — Your Options For If The Appraisal Comes In Low

You found the perfect house — and to be sure you got the contract, you met the seller’s asking price or even bid a little higher than asking. Once you have the purchase agreement in hand, you might think there are no more obstacles in your way, but the home still has to appraise for the amount you agreed to pay for it.

Before the pandemic created a hot market, about 8% of appraisals came in lower than the offer on the home. The so-called appraisal gap began rising in frequency around July 2020, and by June 2021, there was a gap between sales price and appraised value in one-fifth of all home sales requiring financing. Yikes.

The good news is that the number of purchase transactions with appraisal gaps started sliding back to its expected range at the end of 2021, according to CoreLogic, a company that collects and analyzes real estate data. The bad news is that you still have an 8% to 10% chance of encountering a low appraisal.

Understanding your low appraisal options as a buyer is crucial. Selecting the best option could be the difference between making a costly financial mistake and losing the home you’ve set your heart on.

To shed light on your options when the appraisal is lower than desired, we talked to a seasoned real estate agent and two certified appraisers with a combined 50 years of experience in the appraisal industry.

What is a low appraisal?

When you’re financing your home purchase with a mortgage, the lender wants to make sure the property you’re buying is worth what you’re paying for it. The lender will hire an independent expert to appraise the home, aka decide the fair market value of the home.

The appraiser will compare the home you want to buy with homes in the area that have recently sold. These are called comparable sales, or comps, because they should be similar to your home in terms of size, age, location, and condition.

To get the mortgage loan amount you will need to purchase the home with the size of down payment you want to make, the home must appraise for at least the price you agreed to pay for it. Your lender will use the lower amount between the purchase price and the appraised value to determine how much money they will lend. If the appraised value is less than the contract price, you’ve received a low appraisal.

Appraisers dislike the term “low appraisal,” by the way. “The term ‘low appraisals’ assumes the appraiser is wrong,” says Ben Coheen, who has been appraising homes in the Twin Cities, Minnesota area for 21 years. “We’ve been in an unprecedented market with low inventory and buyers offering tens or hundreds of thousands of dollars over the list price. In some cases, supporting this higher price is simply unattainable.”

Why do appraisals come in lower than the purchase price?

There are many reasons for a home to appraise for less than the contract price. For example:

• The seller may have overpriced the house. While real estate agents provide sellers with comps to guide them in setting a price, some sellers decide to push the price higher, perhaps hoping the improvements they have made will justify a higher price.
• You offered more than the asking price. You may have been caught up in a bidding war or offered more than the asking price to prevent a bidding war.
• The appraiser used incorrect information or is missing some information. For example, if the appraiser used the wrong number for square footage, making the house look significantly smaller than the comparable houses, this error could result in a low appraisal.
• The market is moving quickly and the comps aren’t keeping up. Appraisers base their reports on recent sales, but the purchase price data they use could be a few months old as most prices are negotiated well before the sale actually closes. In very hot markets, home prices can go up rapidly in a few weeks, requiring appraisers to determine market conditions and adjust appraisals accordingly, CoreLogic reports. 
• The comps used weren’t the best fit. Perhaps the appraiser couldn’t find recent sales in the area that closely matched the home being appraised, so the results are off.
• The appraiser is inexperienced. “Appraisers complete relatively complex analyses to ensure their market condition adjustments are representative of the market,” CoreLogic notes. Making appraisals in a fast-paced market requires appraisers to make complex analyses of how prices are changing. With more experience, the appraiser has a better sense of what adjustments are needed.
• The house is unique. It can be hard to find good comps for a home with unusual features, making accurate appraisals more difficult.
• You’re getting a cash credit from the seller. Sellers sometimes offer buyers an incentive to help close the deal. For example, if the buyers need cash for closing, the seller might agree to give them $5,000 for closing costs in exchange for raising the sale price by $5,000. However, the arrangement can backfire because the home must then appraise for the agreed-upon price, which might be over fair market value.
• Foreclosures or short sales in the neighborhood. In a short sale or foreclosure, the lender is focused on recouping the money it’s owed on the property, which could be less than the house would sell for otherwise. The bank may accept a lower price that could affect the overall average price in the neighborhood.
• Racism. A Brookings Institute study found that homes of similar quality are valued differently depending on whether the neighborhood is majority Black or if it has few Black residents. Homes in majority Black neighborhoods are valued at 23% less than homes in neighborhoods with few Black residents, but with the same amenities.

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What are my low appraisal buyer options?

When you receive a low appraisal, you should go over your options with both your buyer’s agent and your mortgage lender. Here are five options you should consider:

1. Make up the monetary difference yourself

Some buyers have the cash available to make up the difference themselves, especially if they didn’t buy at the top of their budget. If the appraisal gap is just a few thousand dollars and you’ll still have enough cash to make the down payment and cover your closing costs, you may simply decide it’s worth putting more of your own money in to cover the gap.

However, not every buyer can do that. During the housing market’s hottest period, buyers were writing offers without appraisal contingencies and promised to make up large amounts of money to cover the gap if the home didn’t appraise for the contract amount. Then, “when the rubber meets the road, the money’s not there,” according to Greg Dallaire, an agent with 16 years of experience in Green Bay, Wisconsin.

2. Renegotiate the price with the seller

In a typical housing market, buyers and sellers often negotiate when an appraisal comes in lower than the purchase price. They may agree to meet in the middle, with the seller giving some on the price and the buyer paying a little over the appraised value in cash.

Such an outcome has been rarer in early 2022’s smoking-hot market, but it was common in the past, says Dallaire. He thinks, however, that compromise will return to real estate deals “once we start seeing more balance in the market.”

3. Appeal the appraisal with the lender

It’s not unusual for the buyer’s agent and seller’s agent to work together to try to get the appraiser to reconsider a valuation that they feel is inaccurate. For example, the seller’s agent might provide the appraiser with the comps they used to set the listing price.

Always review the appraisal to make sure the facts are correct. Recently, one of Dallaire’s clients received a low appraisal, and it turned out the square footage was wrong and the appraiser failed to list a full bathroom. “For the most part, appraisers do the best job possible to meet the purchase price number,” Dallaire says. “If they can’t, it’s for a valid reason. Inaccuracies can happen, but it’s a tiny segment.”

Lenders have a reconsideration of value (ROV) process, notes Glen Kangas, who has been a certified real estate appraiser in Los Angeles, California for 27 years. “The items most likely to cause an appraiser to reconsider the value would be a very relevant comparable that was not included in the appraisal report or information about the immediate neighborhood that was not addressed in the report that may affect value. For example, is the property in a preferred school district that sells for more? Is it above or below a street where the value changes?” The appraiser is looking for factual information that shows an adjustment should have been made, Kangas says.

Surprisingly, Coheen suggests that providing comps of relevant smaller homes with fewer features may give the appraiser more insight into what the home is worth than comps of bigger, more expensive houses.

4. Consider applying for a loan with mortgage insurance

For example, let’s say you have won the bidding war and have agreed to purchase a home for $380,000, however, it appraises for just $340,000. Say you had planned to put a 20% down payment on the house, or $76,000, and were preapproved for a loan amount of $304,000, which is an 80% loan-to-value (LTV) ratio based on a $380,000 valuation. If you decide to move forward with the deal and the seller won’t give on price, you’ll have to use $40,000 of what you planned to spend on your down payment to make up the appraisal gap, leaving only $36,000 for your actual down payment. That’s well short of the $68,000 needed if you wanted to put 20% down, considering the LTV will now be calculated with a value of $340,000.

You do not always need to put 20% down when purchasing a home, however. There are options for borrowers with lower down payments, including FHA loans and some conventional loans, among others. Borrowers who put less than 20% down, however, might be required to purchase mortgage insurance. Work with your lender to determine which loan type would be most affordable for your unique situation.

5. Walk away

If your contract included an appraisal contingency, you have the right to walk away from the deal if the home didn’t appraise for the contract price, while still getting your earnest money deposit back. Appraisal contingencies are common in real estate contracts, but in scenarios with multiple offers, buyers sometimes waive such a contingency to make their offer more attractive to the seller.

If your contract didn’t include an appraisal contingency clause, you can still forfeit your earnest money and walk away. However, you’ll be starting the house-hunting process over again, and you may find that home prices have risen even further.

You must weigh all of your options carefully when you receive a low appraisal. There are pros and cons to each, but working with an experienced real estate agent will help you in making these tough decisions. With HomeLight’s agent matching tool, you can be matched with a top agent in just a few minutes and be on your way to closing on your dream home.

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