Mortgage Daily

Published On: December 14, 2022

When Your Property Is Appraised Too Low

No matter your situation- selling, refinancing, or buying- if a home appraisal comes back too low, it could put the entire loan on hold. 

If this situation occurs, what do you do next? Do you get another appraisal? Do you try another lender? Do you change the sale price? Is there anything that you can do?

Let’s look at what some of your options are if you get a low appraisal.

What Exactly Does a Low Appraisal Mean?

The appraised value of your home will be used by mortgage lenders to calculate your loan-to-value ratio (LTV), and it is a huge part of the underwriting process. The LTV will calculate how much of a home’s value the lender will finance you for. 

There are specific limits on your loan that the LTV must stay within.

Your LTV can’t exceed 96.5% of the appraised value for FHA loans. This would mean your maximum loan for a $200,000 house would be $293,000. The difference of $7,000 is what your down payment will need to cover. 

What if the Appraisal Comes Back Lower Than the Purchase Price?

To calculate your LTV, lenders will always use the appraised value, not the purchase price. 

Your lender will usually decrease the amount you can borrow if the appraisal comes in lower than the purchase price. This means you will have to get the seller to lower their asking price or pay more out of pocket. 

If the seller does not agree to lower their asking price to match the appraisal, you will have to increase your down payment to get the same mortgage and interest rate.

So, instead of  $7,000, you would have to put down $16,650 to buy the same $200,000 house. 

Buyer Options for Low Appraisals

If your home is appraising for under the purchase price, there are still some options available:

  • An appraisal rebuttal can be requested by the seller or buyer.
  • The home purchase contract can be canceled by the seller or buyer.
  • To meet the new LTV and down payment minimums, the buyer can increase the down payment.
  • A new negotiation between the seller and buyer can lower the home sale price. 

Home purchase contracts are often written with an appraisal contingency due to the possibility of a bad appraisal. 

If a home fails to appraise for the purchase price, the contingency clause will allow buyers to re-evaluate, and even walk away without losing their earnest money. 

Any purchases that are financed with FHA mortgages will require this contingency.

Appraisal contingencies can also be used to renegotiate or end contracts after an appraiser finds required repairs, like cracked windows or chipped paint. 

It’s a risky move for a buyer to waive their appraisal contingency. If the home appraises for under the purchase price, you can lose your negotiation leverage. 

How to Appeal or Rebut Your Appraisal

In some cases, the home buyer can request an appraisal rebuttal. This formal process is where the buyer’s lender will submit a request for the appraiser to take another look at the appraised price of the home.

Other comparable homes can be submitted to the appraiser, and “missed” qualities about the property that can help boost its value.

It’s common for appraisal rebuttals to have little or no effect. 

Oftentimes, appraisers are not quick to change a home’s value based on this report. The appraiser will submit a response to the rebuttal, which states what value has been changed due to new evidence, or why it hasn’t changed. 

What Happens When the Seller Gets a Low Appraisal Value?

A few things can be occurring if your home doesn’t appraise for your listing price. 

The  real estate agent may have listed your house too high. You can fix this by lowering your asking price. Even in a seller’s market, it can be hard to find buyers who are willing to pay out of pocket, sometimes thousands of dollars, to cover the difference. 

There is also no guarantee that another appraisal will get you a higher appraisal value.

When the market is hot, properties are typically listed at a higher price, with the assumption that competition will drive up the values quickly. There are times when market values rise so fast that appraisal values can’t keep up.

The appraiser will base your property’s value on the recent sale prices of similar houses. 

What Are the Options for Sellers With Low Appraisals?

Sellers have a few different options if their appraisal comes in too low:

  • Request that the buyer makes up the difference in cash.
  • Wait until similar houses sell at a similar price.
  • Lower your price to fit the appraised value.

The best news for today’s sellers is that buyers in the current market are flush with cash. Unlike in the past, it may not be as hard to find a buyer that is willing to pay more.

Some buyers are also so eager to sell they may agree to an appraisal gap guarantee, which stipulates the buyers are willing to pay extra if there is a low appraisal.

What to Do if Your Refinance Appraisal Is Low?

You will most likely need a new appraisal to qualify for a refinance loan unless you are getting a Streamline Refinance through the FHA, USDA, or VA.

Your new loan may not be big enough to meet all of your goals if the appraisal shows the current value of your home is low. 

Your options would be: 

  • Appeal the appraisal.
  • Find a different lender who uses a different appraiser, though you will have to pay for the new appraisal.
  • You can do a “cash-in” refinance, which is where you bring cash to closing to make up the difference between the loan amount and the property value.
  • Take out less cash than you planned. 
  • Hold off on the refinance until you get more equity.

It’s important to keep in mind that if you cancel the refinance, you won’t cancel the appraisal fee you already incurred. If you order a new appraisal, there is no guarantee that the value will be any higher, and you will also be responsible to pay for the new appraisal as well. 

The lender may also not allow an additional appraisal. 

How Does the Appraised Value Affect Your Refinance?

Your appraisal will affect your refinance because it will measure the amount of equity you have in the house.

Your home equity is the appraised value minus your mortgage debt. 

Let’s say you owe $150,000 on your current mortgage and the appraisal valued your home at $225,000, this gives you $75,000 in equity. 

If a different appraiser gave you a $250,000 value, you would have $100,000 equity in your home. 

Your home’s equity will influence your potential interest rates and will determine the size of your refinance loan. It will also determine what additional benefits you can get out of a refinance. 

So, if you have 20% equity and your mortgage is an FHA loan, you could refinance into a conventional loan and get your mortgage insurance payments removed. 

If you want to cash-out when you refinance, you would need more than 20% equity in your home, because lenders require you to have a minimum of 20% equity when you cash-out. 

Automated vs. Human Appraisals 

To save time and money, many refinance lenders are now going with automated appraisals (AVMs). 

A human appraiser can cost more money than an automated appraiser. If you made any improvements that are not noticeable to a “drive-by” appraiser, a human appraiser may be the way to go. 

It is common for homeowners to overestimate the value of their homes. Don’t get your heart set on a certain value or cash-out amount until you had an appraisal to check the real numbers. 

New Constructions With a Low Appraisal Value

Appraisals for new construction and renovation loans are a bit different. The appraiser has a tough job of measuring the market value of a house that doesn’t exist yet. 

The appraiser will study your building plans and the local market to determine the home’s value. 

This is called a “subject-to” appraisal by many lenders because it is subject to your planned project’s completion. 

After the builder is done and the home gets a Certificate of Occupancy, you will need a new loan to pay off the construction loan’s balance. The new loan is sometimes called “take-out” or “permanent” financing. 

If your new construction build did not appraise for a large enough loan to pay off the construction costs, you have some options as a homebuyer:

  • Get a new appraisal
  • Try different lenders
  • Ask the builder if he can reduce costs 

If the builder is responsible for the low appraisal, the quality of construction materials were not the same as in the loan application documents, you can sue your builder to recover some of your losses.

Construction-to-permanent (C2P) loans are common for builder-owners. They combine the permanent mortgage and construction loan into one loan, which can have some advantages and disadvantages. One huge advantage is that you will only need one appraisal instead of two. 

What About New Construction That Is Not Custom?

If you are planning on building a house in a planned development, and plan on financing with a traditional mortgage, you would be in the same situation as any other buyer of a pre-built house.

If the appraisal comes in low, you can back out, make a bigger down payment, or renegotiate. 

Fha 203(K) Loans and Low Appraisals

When financing new construction with an FHA 203(k) rehab loan, you can get lucky. There is a 10% “wiggle room” on the final appraisal value without it affecting your loan terms.

This same “wiggle room” applies if you use a 203(k) refinance to do home improvements when you refinance your loan. 

How Appraisers Determine Your Home Value

Excluding no-appraisal, Streamlined Refinance loans, almost every mortgage application will require an appraisal. 

Many lenders will use automated valuation models (AVMs) to get an estimate of your property’s value, but a huge majority of appraisals still involve a licensed human. 

The three common methods licensed home appraisers use to determine your property value are:

Sales Comparison Approach

This is the most common method for buyers when financing primary homes. 

A sales comparison method lets the appraiser compare your home to other, similar homes in the immediate vicinity.

“Immediate vicinity” is different depending on the region:

  • In dense cities like Chicago, San Francisco, or Seattle, the immediate vicinity would be within 0.25 miles. Usually, this is not more than a few city blocks away.
  • In less-dense, rural or suburban areas, the immediate vicinity could span out a few miles.  

These are the areas that appraisers will be looking at when comparing price values. They will look at traits like:

  • Number of bathrooms
  • Number of bedrooms
  • Age of the home
  • Square footage
  • Quality of the finishes 

The “appeal” of a home can be based on things like the local school district’s ratings and how close the house is to shopping centers, for example.

For each comparable home, appraisers will look at public records for available information about a property, like home descriptions and sales data. They will use this data to calculate the value of your property. 

For example, there is an almost identical house across the street that recently sold for $650,000. Unlike your house, the house does not have a finished basement. Your house could be valued at $670,000.

Comparable homes recently sold in the last 90 days are important in the sales comparison approach, while properties that sold over six months ago are less relevant. 

Other Home Appraisal Approaches

The two other methods appraisers use to value property are the income approach and the replacement cost approach. 

The replacement cost approach will estimate how much it costs to buy your land and build a house similar to yours, then subtract the depreciation.

The replacement cost approach is good if you are looking for homeowners’ insurance and want all the potential insurers to have the same home value information. Some insurers will come up with their own values when they underwrite your policy.

With the income approach, the appraiser looks at rental data in your housing area to see what your home would rent for on the market and then uses these numbers to calculate your property value. 

For investors and landlords, the income approach is most commonly used. 

More Ways to Determine Your Property Value

On top of the home appraisal, there are three additional ways to find a home’s value. They are: 

  • Broker Price Opinion (BPO)- A mortgage broker will assign the value of the home.
  • Comparative Market Analysis (CMA)- Your realtor will analyze the area’s real estate market to help you decide on a listing price or offer price. 
  • Automated Valuation Model (AVM)- A computer program that will look at your home’s value and base it on available market data.

The method you choose for determining your home’s value depends on you. Each tool has its pros and cons. Let’s look deeper into each one:

Broker Price Opinion (BPO)

Paying for a broker price opinion can give you a more accurate valuation. Brokers that have BPOR certification from the National Association of Realtors have finished special training for this work. Lenders typically commission BPOs to find the value of foreclosure homes before they list them. 

While performing a BPO, a broker will examine three recent local sales of similar properties to yours and three currently listed properties. The broker will then compare the features and conditions of those properties to yours. They will then make adjustments according to formulas and offer a value estimate.

A BPO can cost between $50 and $125.

Comparative Market Analysis (CMA)

Real estate brokers or agents provide free home value estimates all the time for potential home sellers. This client sales presentation is called CMA or comparative market analysis. 

The CMA is only as accurate as the agent’s knowledge of your property’s area. Realtors will usually “eyeball” differences and make judgments based on their experience.

When coming up with an asking price, a CMA can give you a lot of useful data. It’s important to keep in mind that an agent doesn’t specialize in evaluating. An agent can always overvalue your listing amount. 

Automated Valuation Model (AVM)

Automated valuation models (or AVMs) can be found online for free. It will estimate your property value by looking at local listings, public records, and trends, and then apply the data to your property. 

If similar homes to yours are selling for 10% more than they did when you purchased your home, your estimated value will most likely be 10% more than your purchase price.

Let’s say you just renovated your kitchen and added $40,000 in equity. The software will have no way of knowing this. 

An AVM won’t always know if some comps were distressed sales, or if a defect in a comps title affected its value. The software also wouldn’t know if a local bidding war increased the area’s sale price above typical market values. 

AVMs are great at demonstrating trends- the extent and direction of changes in property values- but they are less helpful for estimating a specific property. 

Can You Redo Your Appraisal?

In a rising home value area, home appraisals usually don’t appraise for less than their purchase price. It is still a possibility that you can get a low appraisal back, so it’s always good to know your options. 

You can always try a different lender to get a second opinion on your property’s value. It is a great idea if you have proof that the first appraisal was not accurate. 

You can always compare lenders and rates online. 

Tools for Your Next Big Decision.

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