What Happens if the Appraisal Come Back Too Low?

What happens when an appraisal doesn’t come back at the asking price?

The process of selling or buying a home is difficult at times and can require compromise from the buyer and seller. A compromise may need to come into play if a home's appraised value vs. the listed sale price is off base. The appraised value of a home doesn’t always match the sales price, unfortunately. When the appraised value is lower than the sales price, this causes a significant financial problem for the buyer.

The appraisal process involves hiring a professional appraiser to estimate a property’s fair market value. They take the location of the property, its condition, and recent sales of similar homes in the area into consideration to determine the home's market value. An appraisal reveals how much a property is worth. Homebuyers use appraisals to help secure a mortgage loan, as the lender bases how much they will lend the buyer based on the market value determined by the appraisal.

Potential buyers don’t book an appraisal for the home they want to buy until a seller accepts their offer and they apply for a mortgage. Lenders require an appraisal to issue a mortgage loan, but you can choose to skip the appraisal if you pay in cash. The seller’s final sale price may be different from the market value determined by the appraiser ends up being.

It’s best for both parties if the appraised value ends up being similar to the price negotiated by the buyer when they made their offer. If the post-appraisal market value is lower than the price the buyer agreed to pay, the buyer won’t be able to secure a mortgage, as the lender won’t agree to lend them more than what the appraiser says the home is worth. This will lead the buyer to negotiate a lower sales price or they may choose to back out of the sale, which results in a lot of disappointment and wasted time on both sides.

Additional: What to Know About House Appraisals

Mortgage lenders base their loan amounts on the appraisal's estimate of the home's fair market value. This prevents people from borrowing more money than they need to or financing a home priced higher than its worth. This may not seem like a big deal at first glance, but this can lead to the buyer being underwater in their home. When a lower appraisal happens, this doesn’t mean that the lender will refuse to lend the buyer money to buy the home. But the lender will only issue a loan amount that is equal to the loan-to-value.

On the flip side, if a house is appraised for more than the offer price, the buyer has essentially agreed to pay the seller less than the home's market value. That's the seller's concern, not the buyer's. The mortgage amount won't need to change, as the sale price is below the appraisal value, so the lender will gladly issue the loan amount required. If things don't go according to plan and the buyer makes an offer that surpasses the home's appraisal value, they have a few options for how they can proceed.

An appraisal isn't set in stone and it's possible to dispute the original assessment. If the first appraiser doesn't reconsider their initial valuation, the buyer can book an appraisal with a new appraiser to get a second opinion. The buyer also has the option to go back to the seller and negotiate a lower sales price that fits within the appraisal so the buyer can secure a mortgage loan. If the seller refuses to drop the sales price, the buyer can walk away from the sale, as long as they have an appraisal contingency clause in their purchase agreement.

A seller with a good real estate agent is likely to price their home fairly and as long as the buyer doesn’t end up in an intense bidding war that raises the price too high, the appraisal value should come back in line with the sales price.

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