Home Buying: What Happens When an Appraisal Comes in Lower Than Expected?

Once your offer has been accepted, there are still several steps to take before you can close on your new home.

One of those is an appraisal. As part of the mortgage loan process, your lender will order an appraisal of the property. This ensures that the home you have chosen is worth the loan your lender is making.

In most cases, the appraisal comes in at or above the purchase price of the home. But, if the appraisal comes in lower than expected, it could derail the deal.

So, what do you do now?

1. Negotiate a new purchase price

If you’ve been shopping for homes awhile, only to lose out to other buyers, it is easy to overspend in order to beat the competition. Unfortunately, what you offered to pay may not accurately reflect the home’s current value.

In cases where you understand why an appraisal is lower than you’d hoped, your best bet may be to re-negotiate for a lower sale price.

If there is a wide gap between the purchase price and the appraised value, or if there was a bidding war, the seller may not be willing to lower the purchase price enough. In that situation, you may need to meet the seller partway and put more cash into the deal.

2. Increase your down payment

Which brings us to your second option:  increasing your down payment.

If you can come up with additional funds to increase your down payment and close up the gap between the appraisal and your purchase price, you will no longer be borrowing more than it is worth.

One thing to consider, however, is whether you want to actually pay more for a house than its appraised value.

3. Challenge the home appraisal

If you can’t understand why the appraisal came in lower than expected, you may want to exercise your third option, which is to challenge the home appraisal or ask for a second one.

While appraisers are unbiased, trained professionals, their work still represents just one person’s assessment of the house you intend to buy. They are knowledgeable, but can make mistakes.

If your own research and the data provided by your agent don’t seem to support the appraiser’s initial assessment, you have the right to challenge those results.

Speak with your lender about the process for challenging an appraisal, as it can differ from lender to lender. However, you will likely need to show that comparable homes in the area do not support the appraiser’s value.

Besides challenging the appraisal, you might also be able to request a second one. Keep in mind, though, that by requesting a second appraisal, you are risking that the new assessment will be lower than expected as well. It’s best to only go this route if you feel confident that the appraiser made a mistake.

Learning that an appraisal has come in low is disappointing. But it doesn’t always have to mean that you won’t be able to close on your home. The key is to learn why the appraisal came in low. While it is true that a mistake may have been made, it’s also likely that you were about to overpay. It’s a good idea to consider all your options so you don’t regret your decision down the road.