With home prices increasing, what happens when the home doesn't appraise high enough? What options do you have?
A home appraisal is done by licensed professionals to determine a home's value based on other homes in the area. Ideally the appraiser will use 3-6, sometimes more, comparable homes that have sold and closed in the last 3-6 months to determine the value. They look for homes that are similar style, size and ideally within one mile of the home they are appraising. They will make adjustments for the number of bedrooms, bathrooms and several other items. If you are purchasing a home in a city, they will want to stay within the neighborhood if possible – there are times they need to expand the search area.
Home prices have been increasing in many areas, especially with multiple offers. What happens if your appraisal comes in lower than your purchase price? Mortgages have a minimum loan to value (you need a minimum of 3.5% down for FHA loans, for example). So based on the appraisal value, you may need to adjust the mortgage. Typically if you have a low appraisal, you have three options:
- Buyer and seller renegotiate a new, lower home sale price
- Buyer increases down payment to meet mortgage requirements
- Buyer chooses neither option, and cancels home purchase contract
The last option is for the realtors to provide additional data to try and help the appraiser adjust the value. Sometimes this will work, but it's not a guarantee. The appraisers have the same data that the realtors do, so usually they have already looked at the same information. Sometimes the realtor may know of a private sale or something that may not have shown up on the MLS listings and that may help the appraiser.
The possibility of a "bad" or low appraisal are why many purchase agreements have appraisal clauses – this will allow the buyer to try and renogiate or potentially walk away from a low appraisal.
There really isn't any way to guarantee the appraisal will come in at the sales price on a purchase or the home value you need on an refinance. On a purchase, you should make sure your realtor is pulling comparable sales in the area you are buying to see what has sold and if you may have issues with the value. Talk to your agent and make sure you are comfortable with the purchase price of the home you are buying. Remember that the appraisal is done to make sure that the home is worth the price you are paying for it.