What Happens When a Home Appraisal Comes in Low?

A low appraisal can be a gift, a disaster, or a compromise.

Your purchase contract will state the purchase price, as agreed upon by both Buyer and Seller.

Buyers will usually have an appraisal contingency in place, meaning they’re not obligated to purchase the property if it appraises for less than the agreed upon purchase price. The Seller is also not obligated to sell for less than what they agreed to. A low appraisal requires both parties to renegotiate, or walk away.

As a buyer, your financing is based on the lower of the purchase price OR appraisal value. This means you can’t just finance a higher amount, you’d need to pay the appraisal difference outright with additional funds at closing.

In 2020 and 2021, the low mortgage rate environment created a lot of buyer demand, which created a strong seller’s market in Utah (and most of the U.S.). Cheap money meant that a lot of people with extra funds were able to pay above asking price, and often over appraised value. Others were stuck making offer after offer, just to get rejected because their financing ability was limited to the appraisal value.

These days mortgage rates are hovering in the 6’s, which has created a buyer’s market. This means that sellers are more likely to lower their asking price in order to get the deal through.

If your home appraisal came back low, here are the steps to follow.

Step 1: What does the purchase contract say?

Understanding your purchase contract means understanding your options. This is a good time to go over it, and write down the important facts to go over with your buyer’s agent:

• What is the agreed upon purchase price?
• What is the difference between that and your appraisal value?
• Do you have the financing and appraisal contingency protection? What is that deadline, and do you need to extend it while figuring things out?
• Has a copy of the appraisal report been delivered to the listing agent, and have they had time to review it and talk about it with the seller?

Step 2: What does the Seller say?

Depending on the dollar amount difference, the type of market, the seller’s motivation, and the correctness of the appraisal, your seller may drop their price.

Your buyer’s agent and the listing agent will likely have a few conversations on the topic before something is agreed upon and put into writing. Some possible outcomes are:

• The Seller might want to see if you’ll split the difference with them.
• The Seller may want to fight the appraisal by providing additional comparable sales, or pointing out mistakes on the appraisal report.
• The Seller may even ask you to change lenders and order a second appraisal. This may or may not be an option, depending on your loan type, and your lender type.
• The Seller may not budge, which means you either need to pay the difference from your own funds, or  be prepared to walk away (cancel the purchase contract).

Everything is negotiable, so you don’t have to agree to anything you don’t want to do. But it can mean that the deal will fall apart, and you’ll need to find a different house to purchase.

Step 3: What do you want to do?

Lenders calculate your down payment requirement using the lower of the purchase price OR appraisal value. In the case of a low appraisal, if you’re ok with paying above appraisal price, you won’t be able to finance that amount. You’ll need to have the financial ability to cover the down payment plus the appraisal difference (and any applicable closing costs). Otherwise you can:

Ask your loan officer to submit an appraisal dispute (value reconsideration)

They will need at least 2 comparable sales that are better than the ones the appraiser used (and not much older or further away). This should be a task for the listing agent to track down and provide. Your buyer’s agent can help if you’re really motivated to get the home, but keep in mind it’s not your responsibility to help support the seller’s value. Comparable sales that took place AFTER the date on which your appraisal was performed cannot be used. Sometimes this particular bad timing can justify why you may want to take the next step.

Order a second appraisal

If you’re using an FHA or VA loan, you won’t have the option of ordering a second appraisal.

• The FHA appraisal stays with the home via the FHA case number assigned to the address. If the seller decides to go back on the market, they will be stuck with the same FHA appraisal value IF the next buyer also uses an FHA loan.
• The VA appraisal has its own reconsideration of value process that goes through the VA. If that comes back unsuccessful, your only option for a new appraisal is to change the financing you’re using to a Conventional or FHA loan.
• If your loan is Conventional, you can switch lenders and order a second appraisal if you’re using a mortgage broker, and they’re willing to switch lenders. Make sure you extend the purchase contract accordingly, since this will be a new loan submission. 2 weeks should be plenty, and a second submission will go a bit faster than the initial one. If you go the route of the second appraisal, make sure a conversation is had in regards to the path forward should the second appraisal come in low as well.

Pay the difference with additional funds

Sometimes the house is worth it, and buyers have elected to either split the difference with the seller, or pay the entire amount. I’ve had buyers pay anywhere from $1,000 to $17,000 over appraised value to get the deal through when home prices were climbing and inventory was low.

Be willing to walk away

Some sellers may need a reality check, and they may reconsider once they know your intent to cancel the contract. Some may allow you to walk away, just to come back and reinstate the contract at a lower price later on. In my experience, it’s rare that a seller will refuse the drop the price when faced with a reasonable appraisal report.

Sometimes the appraisal report can have errors, or miss important comparable sales. These sort of things can be fixed with a reconsideration of value. Sometimes the square footage of a property is listed wrong, and there’s an appraiser that actually takes measurements (!!!).

Generally, the buyer and seller find a way to move forward, and end up satisfied with the arrangement. Whether you feel like you’ve made the right or wrong decision often depends only on how informed you were about what’s happening.

Whether you’re a Buyer, a Seller, or a real estate agent struggling with a low appraisal value, please feel free to reach out to me for more information and advise.