If you are a potential home buyer seeking a mortgage, you will need a home appraisal to close the deal on the home you want to bid on. Before financing the mortgage, the lender will want to make sure that the loan size isn’t more than the house’s fair market value. The lender will hire an appraiser to provide an unbiased assessment of the house. So what can you do if the home appraisal comes in too low?
First, Determine Why The Home Appraisal Was Low
In order to know what to do about a low appraisal, it helps to understand why it came back low in the first place. There are various reasons why the appraisal came back low. An appraiser uses recently sold listings to figure out the value of your home. They will find at least three nearby comparable homes that are the same size and age as the home you wish to buy. They will look at what those homes recently sold for within the last three to six months. The appraiser will then use regression models and their market knowledge to determine the value of this particular home you intend to purchase.
Explore these 7 common reasons why appraisals come back too low:
- Declining market values
- Rising market values
- Inflated prices
- Overpriced by the seller
- The property is not well maintained
- The underwriter evaluated the property incorrectly
- Foreclosures or short sales in the neighborhood
Next, Determine Your Options
In cases such as short sales in the neighborhood or an inexperienced appraiser who is not familiar with the local market, you may want to consider getting a second appraisal. It may cost more time and money, but it may be worth it in the long run if you can get a more accurate appraisal. You can also challenge the appraisal.
If the low appraisal is justified due to overpricing by the seller, you will need to consider those options as well. You will need to determine whether to yield to the seller or walk away from the deal. There are some questions you should ask yourself to evaluate the situation.
- Do you have extra money to put toward the difference between your offer and the appraisal?
- Are you able to offer the seller more time to stay in the home? Can you suggest a rent-back agreement where the seller remains in the house after the closing, which gives them more time but gives you more leverage?
- Can you take on more of the repairs after the inspection?
- Are you able to be flexible in any alternative ways?
- Is there an appraisal contingency in the contract?
If you have any flexibility to work with the seller, you may have more options. You may negotiate the price with the seller, especially if they are eager to sell. However, you will want to increase your appeal as the buyer by your flexibility and willingness to work with them.
Work with your realtor for additional input. Your realtor can assist you with a plan and the negotiations. It’s possible you can still walk out with the keys to your brand-new home. But realistically, you also need to be prepared to walk away. It’s not worth it if you pay too much for the home and can lead to possible financial situations later down the road.
Are you ready to start your search for your dream home? Contact your local real estate agent to get started!