When purchasing or refinancing a home, you will need to obtain a home appraisal from a licensed or certified appraiser. If your appraisal comes back lower than you anticipated, you may find yourself wondering what to do next.
What is a Home Appraisal?
A home appraisal is an objective assessment of a property’s value. A variety of factors influence a home’s appraised value, such as its location, condition, age, etc.
When you may need a home appraisal:
- Mortgage approval: Lenders require a home appraisal to be part of a mortgage application, as they want to ensure the home has sufficient market value to cover the loan being advanced against it.
- Refinancing: Refinancing or borrowing against your equity will require an updated appraisal.
- Buying & selling: Buyers and sellers use appraisals to determine the value of their homes is fair.
- Estate and divorce settlements: Legal matters such as these often require appraisals.
How is a Home Appraisal Done?
A home appraiser will take a detailed look at both the interior and exterior of your property and take note of things such as:
- The home’s condition, including its age, structural integrity, and maintenance.
- The size and layout of the home, and how many beds and baths it has.
- Upgrades and renovations to the home, including any energy-efficient upgrades.
- The location of the home, its proximity to amenities, and crime rates.
- Supply and demand trends in the market.
Why Will an Appraisal Come in Low?
An appraisal may come in low for a variety of reasons:
- Maintenance and structural issues: Looming structural problems such as a cracked foundation, decaying roof, and bulging walls will all negatively affect a home’s value. Maintenance problems such as outdated HVAC systems, peeling paint, and old appliances will also bring a home’s value down.
- Market factors: The market ultimately affects a home’s value. If comparable homes in the area have sold for below market price, that can affect your home’s appraised value.
- Errors in the report: It’s possible that the appraiser made an error in their report, such as incorrect square footage, features they missed, or out of date comparables.
- Unique factors: A unique home or odd location will affect appraisal values.
What to Do When Your Appraisal Is Low?
Your appraisal has come back lower than you expected, now what? There are a few ways you can approach the situation:
- Review: First off, take a look at the report. Check for factual errors such as inaccurate measurements and if any notable upgrades weren’t taken into account. Also be sure to check that up-to-date comparables were used.
- Challenge: If there are errors or omission in the report, you can ask for a Reconsideration of Value through the lender. Be ready to provide supporting documentation such as receipts for renovations.
- Redo: You can request another appraisal from a different appraiser, though your lender must approve the request.
Next Steps
If your lender refuses a second appraisal, there are still things you can do to keep things moving forward:
- Negotiate: If you are selling your home, you can consider lowering the price of your home or offer to meet the buyer halfway. If you are the buyer, you can negotiate for a lower price or other concessions like covering closing costs.
- Increase your downpayment: The appraised value of the home is how a lender determines how much to lend you. A low appraisal means they will not lend you the amount you need to cover the selling price. You can offset this by bridging the gap with cash or increasing your downpayment. As a last resort, you can consider a secondary loan or ask family members for help.
- Find a different lender: You can find a different lender who’s willing to work with you on the purchase price even if the appraisal comes in low. Keep in mind that this is usually means you will have to make higher interest payments, so budget accordingly.
Receiving an appraisal that’s lower than you expected can be stressful and throw a wrench in your plans, but all hope isn’t lost. Review your options with your agent and keep calm when moving forward.
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