What happens when a home doesn’t appraise?

educated consumerWe are in a seller’s market right now! There is more demand for homes than there are homes for sale (hello supply vs. demand!). The result of this is that buyers are willing to increase their offers in this highly competitive market, especially during bidding wars where multiple consumers are trying to outbid each other for the same property. Many times to higher than the asking price of the home. Homes that are priced right go very quickly and even getting in to see some of the homes may be tough with all the potential buyers looking at them.

One result of this situation is that after the contract is signed and the buyer has applied for the mortgage the property does not appraise for the agreed upon sales price. This is a distressing situation for both buyer and seller. The main reason for low appraisals is that the comparable sales that appraisers use to value property are from the last several months. In a rising market they are usually lower than the sales prices that are happening now. In a slowly rising market there is usually some allowance for the increase and adjustments can be made in the “comps”. In a rapidly rising market (like we are experiencing now locally) the differences are so great that the “comps” can’t be adjusted enough to equal the new higher sales prices.

There are some things that can be done to remedy the situation:

  • If the difference is relatively small many times the seller will agree to accept the lower value as the sales price.
  • Both sides can agree to meet in the middle and split the difference
  • The buyer can appeal the appraisal with the lender.

Since the market meltdown 10 years ago, appraisers have much more independence than previous years. Most lenders use appraisal management companies that act as intermediaries between lender and appraiser so there is a structure to any appeals of valuations. Most lenders will ask for a reason why the comps used are inaccurate. Sometimes there are recent sales that the appraiser was unaware of or there may be features of the house that the appraiser did not see. If there is a good reason most appraisers will consider additional comps and explanations.

If the appraiser cannot change the appraisal depending on the amount of the down payment and the type of loan the loan itself could be restructured to meet the low appraisal. A lender is going to use the lower of the sales price or the appraised value in determining the loan to value ratio (that is the loan amount divided by the sales price or the appraised value). If there was a large down payment, then even with a low appraised value there could be enough equity to meet the lenders requirements. In many cases like that, mortgage insurance may  be required where it wasn’t before.

The main requirement in a situation like this is that both buyer and seller have to be willing to work together. The seller needs to realize that the original sales price cannot be supported by the comps and so even if the agreement is cancelled the next buyer is going to have the same issue. In fact, with FHA loans if another FHA buyer makes an offer on the property within 6 months the same appraisal would be used. The buyer needs to realize that the market is rising and if they decide to wait for another property by then the “comps” may very well justify an even higher price for that property. They may end up paying more than the original price. Another factor is that rates are rising so generally it is better to act sooner rather than later.

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