What Is an Appraisal—and What Happens If It Comes in Low?
You’ve found the house.
Your offer was accepted.
You’re moving forward with your mortgage.
Then someone says:
“The appraisal came in.”
So what exactly does that mean?
What Is an Appraisal?
An appraisal is an independent valuation of the property that may be required by your lender as part of the mortgage process.
The appraiser evaluates the property and considers factors such as the property’s characteristics and comparable sales.
The goal is to provide the lender with an opinion of the property’s value.
Why Does Your Lender Care?
Your lender is lending money based on the purchase of a particular property.
The property provides security for the loan.
The lender therefore has an interest in understanding the property’s value.
An appraisal is one part of that evaluation.
The Appraisal Isn’t a Home Inspection
These are two very different things.
A home inspector focuses on the condition of the property within the scope of the inspection.
An appraiser is evaluating the property’s market value for purposes related to the appraisal assignment.
An appraisal is not a substitute for a home inspection.
What If the Appraisal Comes In at or Above the Purchase Price?
If the appraisal supports the purchase price or comes in higher, that’s generally good news from the appraisal standpoint.
Your transaction still has other requirements to satisfy.
Remember:
One milestone being completed doesn’t mean the entire mortgage is finished.
What If the Appraisal Comes In Lower?
This is where things can get more complicated.
For example:
You agree to purchase a home for $400,000.
The appraisal comes in at $385,000.
Now there is a $15,000 difference between the contract price and the appraised value.
That doesn’t automatically mean the deal is dead.
It means the parties and professionals involved may need to figure out how to address the situation.
There May Be Several Possible Paths
The options available depend on your contract, financing, appraisal provisions and circumstances.
Possibilities may include:
The Seller Reduces the Price
The seller may agree to reduce the purchase price.
They’re not necessarily required to do so.
It becomes a negotiation.
The Buyer Brings Additional Money
Depending on the loan and the buyer’s circumstances, the buyer may decide to bring additional funds to the transaction.
But this is a significant decision.
You should discuss the financing implications with your lender before making that decision.
The Parties Negotiate Another Solution
There may be other ways to structure a solution depending on the transaction and what the contract permits.
Your real estate professional can help with the negotiation.
Your lender can explain the financing implications.
Your attorney can advise you on legal matters.
Don’t Immediately Blame the Appraiser
A low appraisal can be frustrating.
But remember:
The appraisal isn’t supposed to simply confirm the price you agreed to.
The appraiser is performing an independent valuation.
If you disagree with the result, there may be procedures available to address questions or provide additional information, depending on the lender and appraisal process.
Your lender can explain the appropriate process.
This Is Why Pricing Matters
When you’re making an offer, you’re not operating in a vacuum.
Comparable sales and market conditions matter.
Your broker can help you understand available market information and discuss how your offer compares with recent sales and competing properties.
That doesn’t guarantee an appraisal result.
But it helps you make an informed decision before you ever get to the appraisal stage.
Don’t Spend Money You Don’t Have Yet
If the appraisal comes in low, don’t immediately decide:
“I’ll just bring the difference.”
Talk to your lender first.
Understand how it affects your loan.
Understand what cash you’ll need at closing.
Understand what you’re giving up by putting additional money into the transaction.
Then decide.
What Happens Next?
If an appraisal issue arises, we’ll look at the facts.
We’ll review the contract provisions that apply.
We’ll talk through the available options.
Your lender will explain the financing implications.
Your attorney can address legal questions.
Then you’ll decide how you want to proceed.
The Bottom Line
A low appraisal can be stressful.
But it doesn’t automatically mean you’ve lost the house.
It means there’s a difference between the purchase price and the appraised value that needs to be addressed.
Don’t panic.
Get the information.
Understand your options.
Know your contract.
Talk to the right professionals.
Then make the decision that makes sense for you.
Note: Appraisal procedures and contract rights vary by lender, loan program, state and transaction. This page is educational and is not financial or legal advice.
Have a Question?
Buying a home comes with a lot of questions. You don’t have to figure everything out on your own.
Have a question about something you read here? Want to talk through your situation? Or just not sure what your next step should be?
I’m happy to help.
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