You made an offer on your dream home and the seller has accepted. Congratulations! You are moving forward towards closing. However, one most important step before you close on the deal is getting an appraisal on the property. It tells you and the lender how much the property is worth and influences how much the lender is willing to lend you. Your lender will not loan you more money than what the home is worth.
Unfortunately, the appraisal does not always correspond to a home’s market value. It can occur in any market whether hot, cold, or neutral. A low appraisal, however, may not always imply the end of a transaction. You have several options to get a good bargain on your dream property.
1. Re-Negotiate The Price
A low appraisal has an impact not only you as a buyer but also on the seller. The seller will realize that subsequent offers can also result in a comparable difference between the appraisal and the offer. This means that unless they are ready to wait for a cash offer, they will have to deal with the same issue. So, they may be willing to reach a compromise.
Your agent will approach the seller to negotiate a price that is more in line with the home’s appraised value. For example, if the home is selling for $170,000 but appraised for $160,000, the seller may elect to drop the price to go through the transaction.
If the seller refuses to lower the price to reflect the appraised value your agent will try to negotiate a lower price that reduces the amount you will have to bring to the table to seal the deal.
You can also go fifty-fifty; for example, if the home was undervalued by $20,000, the seller could decrease the price by $10,000 and you could put an additional $10,000 out of pocket to seal the deal.
2. Ask For A Review Of The Appraisal Or Request A New Appraisal
First request for a copy of the appraisal report from the buyer and scrutinize it to ensure there are no major flaws. Do you see any discrepancies like inaccurate square footage value or the number of bedrooms? Are there some salient facts about the property the appraiser missed or overlooked? Did the appraiser use incorrect or outdated comps? Is there any critical information in the report that you might have overlooked?
Then discuss the report with your lender and make a strong case for an appraisal review if you can. You can also request a fresh appraisal, but you’ll have to pay for it, and there’s no assurance that your lender will agree or that the new evaluation would be more accurate.
3. Rework Your Mortgage Financing
Another option you have is to rework your mortgage. For example, if you intended to put $60,000 down on a $300,000 home (a 20% down payment).And, if the appraisal is $12,000 undervalued, you may be able to use $12,000 of the money set aside for a down payment to make up the difference.
The disadvantage is that you will be putting less than 20% down and will be required to pay private mortgage insurance (PMI) every month until your loan-to-value ratio reaches 20%. This agreement is, of course, contingent on your lender approving the lower down payment and larger loan amount.
4. Boost Your Down Payment
Another option you have if the seller is not willing to cut a deal is to increase your down payment. If your down payment covers the difference between the sale price and appraised value, the lender will likely let the mortgage process proceed on the same conditions. However, not all home buyers will have enough cash on hand or the desire to take this step, so talk to your agent first.
5. Pay More Upfront
The final alternative to bridge the gap between the appraised value and the home’s selling price is to use your own money if you have it. Paying a little extra upfront reduces the amount your lender has to finance. It can also make the difference between a lender approving your mortgage or not. However, before you spend more than the house is worth, ensure that you plan to stay in it for a long time. You will be entering a home that is more than the market value and taking a risk that may lead to an underwater mortgage (where you owe more money on your house than it is truly worth). If you have to sell your home in the next several years, then it is likely that you will have to sell it at a loss.
Understanding how important a low appraisal is for you as a buyer can help you plan for contingencies. You should also ensure that your purchase agreement contains an appraisal contingency, especially if your budget is low and the purchase is dependent on a mortgage. This will permit you to quit the deal without penalty if your home does not appraise for the amount you agreed upon. It may also make your offer less appealing to sellers, but there are other methods to create a unique offer.
For more information about the home appraisal process click here.