What to Do When Your Home Appraisal Comes in Low
Understand your options and next steps if a home appraisal falls short of the agreed-upon purchase price.
- A low appraisal creates an "appraisal gap" where the home's value is less than the agreed-upon price.
- This gap impacts your mortgage financing, as lenders only lend up to the appraised value.
- Buyers can cover the difference, renegotiate the sale price, or, with a contingency, walk away.
- Review the appraisal report carefully for errors or overlooked comparable sales to challenge the valuation.
A low home appraisal occurs when a professional appraiser determines a property's market value to be less than the price a buyer and seller have agreed upon. This discrepancy, often called an "appraisal gap," can complicate a home sale, as it directly impacts the buyer's financing and the overall terms of the transaction.
The Appraisal Gap's Impact on Your Mortgage
Lenders base the maximum amount they will finance on either the home's appraised value or the agreed-upon purchase price, whichever is lower. If the appraisal comes in low, the lender will only approve a loan up to that lower appraised value. This means the buyer is responsible for covering the difference between the appraised value and the purchase price, often out of pocket, or the deal needs to be renegotiated.
Buyer's Options When an Appraisal is Low
When faced with a low appraisal, buyers generally have a few paths forward:
- **Cover the Appraisal Gap:** The buyer can choose to pay the difference between the appraised value and the purchase price in cash. This is a common solution in competitive markets.
- **Renegotiate with the Seller:** The buyer can ask the seller to lower the sale price to match the appraisal, or to meet the buyer somewhere in the middle. The seller might agree if they want to avoid putting the home back on the market.
- **Walk Away (with a contingency):** If the purchase agreement included an appraisal contingency, the buyer can typically terminate the contract and receive their earnest money back without penalty. Without this contingency, walking away could mean losing your earnest money.
Challenging the Appraisal Report
Both the buyer and seller (often through their respective real estate agents) have the right to review the appraisal report. Look for factual errors, such as incorrect square footage, number of bedrooms/bathrooms, or significant improvements that were overlooked. You can also identify more relevant comparable sales (comps) that the appraiser might have missed or undervalued. Your lender can then submit a “reconsideration of value” request to the appraiser with this new information, though success is not guaranteed.
A low appraisal matters significantly because it can jeopardize the entire home purchase. It forces both parties to re-evaluate the deal, potentially requiring more cash from the buyer or a price reduction from the seller. Understanding your options and being prepared for this scenario can help you navigate what can be a stressful and costly hurdle in real estate transactions.
- Discuss an appraisal gap strategy with your real estate agent *before* making an offer, especially in a competitive market.
- Consider adding an appraisal contingency to your offer to protect your earnest money if the appraisal comes in low.
- If you're a seller, ensure your agent provides the appraiser with a list of recent upgrades and strong comparable sales.
