What Happens When A Home Doesn't Appraise
When a home's appraised value comes in lower than the agreed-upon purchase price during a real estate transaction, several challenges can arise. Here’s a breakdown of what happens:
Why the Appraisal Matters
The appraisal is a professional estimate of the home's market value. Lenders use it to determine how much they are willing to loan for a mortgage. If the appraisal is lower than the purchase price, the lender will base their loan amount on the appraised value, not the agreed price.
Common Outcomes
- Renegotiation of the Purchase Price:
The buyer and seller may renegotiate to lower the purchase price to match the appraisal value. This is common, especially if both parties are motivated to close the deal.
Who Pays the Difference
If the buyer is financially able and willing, they can pay the difference between the appraised value and the purchase price out of pocket.
- Challenge the Appraisal:
The buyer or seller can request a review or second appraisal if they believe the first appraisal was inaccurate. This might involve providing additional comparable sales or correcting errors.
- Terminate the Deal:
If the appraisal contingency is included in the purchase agreement, the buyer may have the right to walk away without penalty if the appraisal falls short.
- Seller Offers Financing or Incentives:
To salvage the deal, the seller might offer financing options, such as carrying a second mortgage, or other incentives to keep the buyer engaged.
Impact on Financing
A lower appraisal can also affect the buyer’s loan terms or approval. For instance:
- The loan-to-value (LTV) ratio changes, which might require private mortgage insurance (PMI) or higher interest rates.
- The buyer might need to increase their down payment.
Emotional and Market Implications
- For Sellers: It can feel like a blow to their expected profits and might lead to tough negotiations or relisting the property.
- For Buyers: It could strain their budget or make them reconsider the property.
Preventing Appraisal Gaps
- Sellers can set realistic listing prices by researching comparable properties.
- Buyers can stay informed about market trends to avoid overbidding in competitive markets.
Navigating a low appraisal often requires communication, flexibility, and, in some cases, professional guidance from real estate agents.
