What happens if I get a low home appraisal?

Under contract on a home and just found out the appraisal came in lower than your offer? Chances are that you popped the champagne when you won the bid, and you've started dreaming up ideas for your new home. We get it. Learning weeks later that your appraisal came in low can be outright devastating. 

It turns out you're not alone right now. Why's that?

Why appraisals are coming in low right now

Over the past year and a half, we've experienced the hottest housing market in recent history.  Median home prices are up 20+ percent thanks to a combination of factors, namely low-interest rates and an influx of millennials buying homes.

Referred to as a seller's market, there are simply more folks looking for homes than homes on the market. This scarcity means prices are high and sellers have the upper hand when it comes to negotiating. 

So what does all this mean for low appraisals, you ask? 

Low appraisals are a common side effect during a hot real estate market. Wondering how often appraisals come in low? On average, Fannie Mae suggests only 8% of listings. But during a seller's market, you can see that percentage double.

That's because appraisals are based on comparable home sales that closed before yours. During a hot real estate market, past home values can't keep up with new listings that sell in a day's time. Plus, bidding wars—again common during a seller's market—are simultaneously driving the prices up even higher. 

To win bids, motivated buyers will even waive appraisal contingencies—essentially promising upfront to pay the difference if the appraisal is lower than their offer. 

Value of an appraisal 

So is it okay to shrug off a low appraisal or even waive an appraisal contingency? Let's take a moment to consider the importance of the appraisal in the first place.

An appraisal is supposed to serve as an unbiased professional opinion of a home's value. Appraisers are third-party folks who are hired by the lender and paid for by the buyer. They're used to assure the lender that the contracted value of the home can be supported. 

What all that means for you as a buyer is: if you plan to finance your home through a lender and your appraisal comes in low, you're on the hook for the difference. Let's say, for example, you offer $200,000 for a home, and the appraisal value comes back at $185,000. The bank will only lend you the appraised value ($185,000), which means you'd have to come up with an additional $15,000 to purchase the home. 

All in all, the appraisal is a helpful step in the process that prevents buyers from overpaying on homes and helps lenders understand the value of the homes they agree to finance.

That said, keep in mind that appraisals are opinions, and appraisers are humans. There may be more to keep in mind when reflecting on the true value of a home. In other words, you don't have to go running if your appraisal comes in low. 

What to do when the home appraisal is low

Try to renegotiate the price

If the home has been on the market for months, the seller is motivated, and/or the market is slowing, you may have an opportunity to renegotiate your purchase price down to the appraised amount or somewhere in between. This is often the best-case scenario. 

Make up the difference in cash

If the seller won't budge, and your financial situation can support it, you can continue with the sale by making up the difference between the purchase price and the appraisal value. 

Shift your financing 

Let's say you don't have additional cash available to make up the difference. You may be able to shift your down payment amount. For example, if you had originally planned to put 20 percent down, you could decrease that to 10 percent (assuming your lender approves it), which would free up more cash for the difference. Keep in mind, you'll have to pay private mortgage insurance (PMI) every month until your equity is up to 20 percent. 

Appeal the appraisal 

If you think your appraiser used bad comparables or inaccurate information, you can always work with your lender and agent to dispute the appraisal. 

Cancel the contract 

No one wants to see it come to this, but if you've signed an appraisal contingency, you can choose to walk away from the contract. 

Make the decision that's right for you 

As a buyer, you have options. Low appraisals can be a bump in the road or the end of the road. And only you can make that decision. If you've found your dream home or you plan to stay in your home for several years, you may easily make that money back and more.

Contemplate these options and other home-buying conundrums with insights from mortgages.com. Plus, rely on trustworthy agents and lenders to support you along the way. Happy hunting!