You’ve found that perfect home, and your real estate agent has helped you to negotiate an acceptable contract price. The seller accepts the offer and you’re on your way to a set of keys.
Things are rocking along. The home inspection went pretty well. There were a few minor things to work out with the seller, but they agreed to the repairs. Your mortgage agent got you a great mortgage. Things are looking great; then the appraisal comes in. It’s $11,000 below the agreed purchase price of $268,000. This is totally unexpected, and now you wonder if you made a bad decision, as well as what you should do now. This is why you should NOT remove conditions even if your mortgage is approved since most lenders will make it a condition of your mortgage that the appraisal comes in at the sale price. A lender may rescind their mortgage commitment, or they are going to expect you come to up with difference if the appraisal comes in lower.
Appraisals After the Crash
The housing and mortgage crash that shook the financial world beginning in 2007 resulted in a great many changes to mortgage approval processes. Lenders took a portion of the blame for the crash, being accused of granting mortgages to a great many people who really couldn’t afford them. Appraisals were targeted as well, with some saying they were inflated to get deals done. The government stepped in and put new rules in place with a new rate qualification.
Lenders are far fussier on who does their appraisal. Often lenders require selection from a pool that are approved by them. You cannot use who you want. Whether this is a factor in your low appraisal in this example or not, you still have a situation and must deal with it.
Dealing with the Low Appraisal
Sometimes a reappraisal is ordered, and it is done by a different appraiser. It can solve the problem, but not in many cases. So, what are you to do now? Though you can just add that $11,000 to your down payment, it’s probably not the best first reaction. Often the first step buyers take is to ask the seller to reduce the price to the appraised value. This may put everything back on track, even lowering your down payment and future mortgage payments.
If the seller doesn’t want to do this and a second appraisal doesn’t fix the problem, then you can negotiate something between the two extremes. Perhaps the seller can reduce the price by $6,000 and you can increase your down payment by $5,000. This may or may not be acceptable to either side, and the ultimate resolution of the problem can be walking away from the deal and finding another home.
Sometimes your decision on what to do is influenced by the negotiation of the original purchase price. If you felt you were paying more than you wanted, then walking away may be the best choice providing you did not waive conditions. If you were celebrating negotiating a great discount, then maybe you’re willing to give up a little of that to keep the deal moving. One other wrinkle is how the home inspection report looks. If you had issues for negotiation, it’s just another variable you must deal with. Now you’re asking the seller to reduce their price and fix things. It could be a hill too steep to climb.
While low appraisals are not that common, they do happen. Knowing your options helps to reduce the shock and deal with the issue.
So yes, I love doing what I do. If I can help you find the right financing, please don’t hesitate to call me.