What You Need to Know About Appraisals When Buying a Home
You found it. You made the offer. The seller said yes. And then the appraisal comes back low. Definitely not the update you were hoping for — but don’t mentally hand the keys back just yet! A low appraisal can change the financing equation without automatically ending your purchase. Now we find out how big the gap is, what your contract allows, what the seller is willing to do, and whether there’s still a path that gets you through that front door.
Appraisal issues still delay some closings, so this is one part of buying a home that’s worth understanding before you ever have to deal with it. If you’re getting a mortgage, your lender may use an appraisal to help evaluate the property behind the loan. Most appraisals quietly do their job and the transaction keeps moving. When one comes in low, though, it’s time to look at the possibilities.
WHAT IS AN APPRAISAL?
An appraisal is an independent professional opinion of the property’s value supported by market information. Depending on the assignment, the appraiser may consider location, size, condition, features, improvements, and comparable sales to develop that opinion.
It’s different from a Comparative Market Analysis (CMA) prepared by a real estate professional. A CMA helps us understand how a property fits into the market. The appraisal has a different assignment: developing an independent valuation, often for the lender helping you finance the purchase.
WHY IS AN APPRAISAL NEEDED?
Your lender wants to know whether the property provides enough collateral for the mortgage you’re requesting. Depending on your financing, that may involve a traditional appraisal or another acceptable valuation method.
And here’s something useful: for a typical first-lien mortgage, you’re entitled to a free copy of the appraisal or other written valuation obtained by the lender. Don’t just jump to the last page and look for the number. Take a look at the property information and comparable sales too. There may be useful information in there.
Paying cash? There’s no mortgage lender requiring an appraisal, although you can still choose to get an independent valuation if you want one.
THE NUMBER CAME IN LOW. NOW WHAT?
First, remember that the appraisal didn’t suddenly change the house you wanted yesterday. It changed one piece of information surrounding the purchase — and potentially the amount your lender is willing to finance.
So now we figure out what we can do with that information.
- You may be able to walk away. If your contract has an applicable appraisal or financing contingency and its requirements are satisfied, cancellation may be one of your choices. Knowing you have an exit doesn’t mean you have to take it.
- We can reopen the conversation with the seller. Maybe the seller reduces the price. Maybe you cover part of the difference. Maybe both sides move enough to keep a transaction everyone still wants alive. A gap creates a new negotiation — and a new negotiation creates possibilities.
- You may decide the home is worth some additional cash. If your lender permits it and you have the funds available, you may choose to bridge some or all of the difference yourself. Just make sure enthusiasm for the house doesn’t keep you from considering what that additional cash means for everything else you want to do after you own it.
- The appraisal may deserve another look. If there’s an actual error, something important appears to have been missed, or the comparable sales raise legitimate questions, ask your lender about its reconsideration-of-value process. You may be able to provide additional relevant information for review. A change isn’t guaranteed, but a legitimate question is worth asking.
DON’T LET ONE NUMBER MAKE THE WHOLE DECISION
The appraisal deserves your attention, but so does everything else you know about the home and your plans. How long do you expect to live there? How hard would it be to replace this property with another one you like as much? How large is the appraisal gap? What would covering some of it do to your cash reserves?
Sometimes the answers point toward renegotiating and moving forward. Sometimes they tell us the better opportunity is still out there.
If your appraisal comes in low, we’re not going to let one unexpected number make the decision for us. We’ll understand what changed, look at your contract, talk with your lender, explore what the seller may be willing to do, and figure out which choices are still on the table.
The home you want may still be on the other side of this hurdle. And if it isn’t, we’ll know we made that decision because something better makes sense for you — not simply because the appraisal surprised us.
