You bid on your dream house and the seller accepts it. Your excitement dwindles the moment you get the appraisal, though. The value is much lower than your offer. Now what? Will your lender let you buy the home? We discuss your various options below.
Determine if the Appraisal is Right
Your first step is to see if the appraisal is right. You have the right to fight it. It’s called a dispute or a review. Every borrower has the right to ask for one. Without knowledge of the industry, though, this could be near impossible. This is where your lender and/or real estate agent can help.
The combination of knowledge between the 3 of you can determine if the value came in too low. Mistakes happen. A few of the most common are:
- Use of inappropriate comparable properties
- Overlooking certain upgrades the home you bid on has
- Human error
Disputing the report isn’t a fast process, though. This is why we encourage an appraisal contingency on your contract. This gives you time to work with the appraiser and get the correct value. If you go past the contingency period, you’ll be on the hook for the home no matter what. If you back out of the contract, at the very least you’ll lose your earnest money. The penalties could be even worse, though.
If you think something is off with the appraisal, make sure you react right away. Also make sure you have the support of your lender or real estate agent to make sure things move along.
Negotiate the Purchase Price With the Seller
If you have a contingency on your purchase contract, you have time to negotiate with the seller. With the lower value, you may not get financing. This may make the seller willing to negotiate with you.
There are two ways you can do this:
- Ask the seller to meet the appraised value. This would be the easiest for the sake of the approval, but the hardest to get a seller to agree to. Sellers don’t want to take a loss. In their eyes, lowering the price may mean just that.
- Meet the seller halfway. If you split the difference with the seller, he might be more willing to negotiate. This means you pay half of the difference between the appraised value and the loan amount. The seller then lowers the price the amount of the other half.
Come up With the Cash to Make Up the Difference
If the appraisal is accurate or there’s nothing you can do about it, you have another option. You can make up the difference in cash. By make up the difference, we mean pay the difference between the appraised value and your offer.
Here’s an example:
You bid on a home and your offer of $250,000 was accepted. Unfortunately, the appraisal came back at $225,000. Your lender was willing to provide you with 80% of the bid assuming the value was the same or higher. Since it isn’t, the lender can only offer you 80% of the appraised value.
Your maximum loan amount is now $180,000. You were originally planning to put down 20% of $250,000 or $50,000. You were also banking on a loan amount of $200,000. But with the new loan amount of $180,000, you need $70,000 total.
If you have the cash, you may still be eligible to purchase the home. However, the lender must approve you putting the money down. In other words, you must prove you can afford the higher down payment plus the closing costs. If the lender required a certain amount of reserves for loan approval, you’ll still need that as well.
Take Out a Different Loan
If your current loan won’t go through, you have other options. You can shop around with other lenders to see what they have. For example, if your current lender will only give you 80%, you may want to shop for a lender willing to offer a higher loan.
In the above example, the lender offered an 80% loan. What if another lender offered 90%? This would increase your mortgage payment each month and would likely add private mortgage insurance, but it would get you your home.
Here’s how that works:
A 90% loan on the $225,000 value means $202,500. The purchase price was $250,000. This puts you at slightly less than the original $50,000 down payment you were making. With a $47,500 down payment, you can have the home.
Keep in mind, you’ll pay PMI until you owe less than 80% of the home’s value. Paying the inflated price will cause you to pay PMI for a longer period.
Find Another Home
Your last option, which is one no one likes, is to walk away. If the seller won’t negotiate with you and you have an appraisal contingency, you can stop the process. You’ll still get your escrow money back as long as you act before the contingency expires.
Sometimes this option works the best. It helps you avoid paying an inflated price for a home. Even if it is your dream home, you have to keep a level head. It could take you many years to break even, let alone get ahead. If you move anytime soon, you won’t’ make any type of return on your investment. Real estate is supposed to provide you with some type of return.
Walking away can help you avoid making a bad investment from the start.
The Final Word
Really stop and think about buying a home with a low appraisal. Even if you have the money, it’s not always the best idea. Get advice from your real estate agent. Let him tell you what the other homes in the area have done. He can give you an idea if you are sinking money into a bad investment or not.
If you think the appraiser operated with errors, dispute them. Just know that the process is time consuming. If you have a contract date to abide by, you must act quickly. Making the decision to buy the home, though, is something you should take seriously.
Get as much advice as you can. Then find the lender that is willing to offer you the most lucrative terms on your purchase.