Whether you are an aspiring homebuyer, or a homeowner looking to refinance your home, getting an appraisal can be a nerve-wracking process, as a lower than expected appraisal can hurt your potential of getting the mortgage that you need. What do you do if your appraisal comes back lower than expected?
Before beginning the appraisal process, it is a good idea to understand what appraisals are, why they sometimes come back low, and what you can do if you find yourself in that situation.
Home Appraisals 101: Everything You Need to Know
A home appraisal is a professional estimate of the value of your home. Appraisals are essential
in the home-buying process since they ensure that you are not overpaying for real estate.
Appraisals also ensure that lenders do not lend you more money than your house is worth.
Appraisals ensure that lenders do not lend you more money than your house is worth and that the mortgage amount falls within the loan-to-value guidelines that the lender is comfortable with. If you default on your debt, this protects the lender from suffering a significant financial loss.
Appraisals are also important in the mortgage refinance process since they provide you and your mortgage lender with up-to-date information on your home's value, and its appreciation or depreciation. This helps your lender in determining how much equity you may be able to access if you decide to refinance your home and use the available equity for other purposes.
Types of Appraisals
There are two major types of appraisals, purchase appraisals and refinancing appraisals.
If you are a buyer looking to take out a mortgage on a property, you would seek a purchase appraisal. When you buy a house, you will need a purchase appraisal in order to qualify for a mortgage loan. If you are foregoing a mortgage and paying cash, then you can avoid an appraisal before purchasing a home, otherwise almost all lenders will require a formal appraisal. The requirements for purchase appraisals not only benefits the lender, but it also benefits you as the buyer. You do not want to overpay for a house that is not worth it.
If you are a homeowner looking to refinance your home, you would need a refinancing appraisal, which is essentially identical to a purchase appraisal. The main difference between the two is that buyers cannot visit the property during a purchase appraisal, but homeowners are free to attend a refinancing appraisal.
How Are Appraisals Conducted?
The most commonly used appraisal method involves comparing your home to similar homes in the area. An appraiser will put together a list of similarly sized homes in your area, sold in the past month or so, that have similar amenities and features to your own. Appraisers then scan public records for home descriptions, sales data, and other available information about each similar home. The value of your property is then calculated using this information.
Home appraisals can also involve other methods of valuation. Some appraisers may value your property based on its “replacement cost,” or in other words, the cost it would take to buy your land and build a house like yours on that land. Others may choose to consider the market-rate for rent in similar properties to your own, and use these figures to approximate your home’s value.
Regardless of how your appraisal is conducted, there is always a chance it will produce an unfavorable result. What do you do if your appraisal comes back low?
What a Low Home Appraisal Means
As a homebuyer, getting a low appraisal is the last thing you want. Most mortgage lenders will not lend you more than a specific percentage of the appraised value, called the Loan to Value (LTV), because it now represents the market value of your home. In a refinance situation, a low appraisal will also limit the amount of equity available to the homeowner to borrower and refinance.
Mortgage lenders make money by giving out loans, and they may take a loss if you are unable to pay your loan back. If the value of your loan is greater than the market value of your home, there is an increased risk that your lender will not be able to make back the difference when faced with a power of sale scenario.
Mortgage lenders also use the appraised value of the home to calculate your loan-to-value ratio (LTV) which determines how much of a home’s value they will finance. If the appraisal you receive is lower than expected, your minimum down payment might increase to make up for the difference.
If you find yourself in this situation, there are a few ways you can proceed. Here are some options you can consider:
- Walk away: your purchase contract may include a contingency clause called Condition of Financing. If this clause is present in your agreement of purchase and sale, and the appraised value of the home you are purchasing falls below the agreed upon purchase price, you may be free to walk away from the deal if you cannot get the financing you need as a result.
- Ask the seller to reduce their selling price: one of the easiest ways to resolve a low purchase appraisal is to renegotiate the property price with your seller. In order to guarantee the sale, the seller may lower the price to match the appraisal if they are eager to sell their home and want to avoid the hassle of relisting it.
- Increase your down payment: a low appraisal will decrease the maximum size of your mortgage. However, if you have the capital to do so, you can simply make up this difference by putting down a larger down payment.
- You (or the seller) can request an appraisal rebuttal: whether you are dealing with a purchase or refinancing appraisal, this can be a great option if you feel the appraised value of the property was unjustified. An appraisal rebuttal is a formal request for a re-examination of the property. You are also free to forward any additional information about the home or surrounding area that you feel the original appraiser may have missed. A seasoned mortgage broker would be able to help in this process and increase the likelihood of your lender agreeing to a second appraisal.
How to Improve Your Chances for a High Appraisal
One of the most common causes of a low appraisal is an inflated selling price. In overheated markets like the GTA, many agents will list homes at an inflated value, assuming that the high demand for housing will push buyers to match or even out-bid the asking price. Fortunately, this also means that sellers are often willing to adjust their prices around appraisal results.
Outside of price inflation, there are a few other factors that can affect the appraised value of a home. Whether you are a buyer, a seller, or a homeowner looking to refinance, here are some steps you can take to increase your odds of a high appraisal:
What Can You Do as a Seller or Homeowner?
- Before you begin your appraisal, compile a list of all the upgrades and renovations that have been made to the property. Make sure you present this list to your appraiser as home improvements can increase your appraisal value.
- If the home has received multiple offers, present this data to your appraiser. It may be helpful for them to know what buyers are willing to pay for the home.
- Make sure the interior of the house is well-prepared for appraisal. It is a good idea to clean up the rooms, and potentially employ some home-staging techniques to help make the property more presentable and appealing to the appraiser.
What Can You Do as a Buyer?
- When choosing a home, consider if the asking price lines up with the factors considered in an appraisal. Awkward floor plans, a lack of curb appeal, and old wiring or appliances can all detract from the value of a home.
- It is also important to look at the surrounding neighborhood. Crime rates, accessibility, and surrounding infrastructure will all play a role in the appraisal value.
Whether you are a homebuyer or a homeowner, working with a Clover Mortgage broker can be a great way to improve your mortgage and home appraisal experience. If your appraisal comes back lower than expected, our professional team of brokers can help you explore your options and choose the best path for you and your needs.
Contact Clover Mortgage brokers to book a free consultation with one of our experts today!