Steve and Lisa's Mortgage Morsels

Prior to obtaining a mortgage approval, buyers are required to have the prospective property appraised by a licensed professional, which is typically arranged by the lender. The appraisal is a detailed report about the value of the home and assures the bank that the home’s value is equal to the purchase price. The best case scenario is that the appraisal supports the purchase price. Savvy buyers will include a contingency clause in their purchase agreement that the property will appraise for asking price or better.

To determine the value of the home, the appraiser will take many things into consideration: the condition of the home, the neighborhood, what similar homes are selling for in your area, and how quickly similar homes sell. The appraiser’s focus will be, for the most part, on the square footage of the home, the lot size, the number of bedrooms and bathrooms, garage space, and deck/porch space.

If an appraisal comes in less than asking price what are my options?

Sometimes, an appraisal can come in lower than the asking price. This can throw a wrench in the gears of the closing process because a lender will typically loan only 80 percent of the appraised value. For example, a seller agrees to a homebuyer’s offer to purchase the home for $250,000. The buyer agrees to put 20 percent, or $50,000, as a down payment and applies for a mortgage to cover the remainder, which totals $200,000. If the home is appraised at $220,000, the bank will mortgage only 80 percent of that amount ($176,000), not the $200,000 the buyer needs.

What to do:

There are several options you can exercise to keep a home sale from stalling out if an appraisal comes in lower than expected. First, review your appraisal to learn what comparable properties were used and why the value came in where it did. If you believe the appraisal is off the mark and if you can provide enough evidence to support a different value, you may be able to have the appraised value modified by contesting it. Contesting an appraisal is best done with the guidance of a real estate professional.

If you opt to try to get the appraisal modified, bear in mind that quick action is important. As the buyer, you must find adequate financing in order to close or complete the sale within the agreed-upon period. If interest rates rise during the appraisal-related delay, further financing problems can also arise. The time it takes to contest the appraisal may be longer than the contingency clause in your agreement.

You can also renegotiate the purchase price with the seller. This may be easier than you think: if you walk away from the purchase, the seller loses the agreement of sale as well as the cost of inspection and other costs. In addition, there is no guarantee that the seller will find another buyer or that a re-appraisal will come in for the asking price.

The last resort is to walk away from the purchase. As mentioned above, because your sales contract most likely has a contingency clause, you can cancel the purchase contract and get your earnest money back, as long as you do so within the contingency period.

Sources:

MacDonald J. How to avoid a low home appraisal [online]. Bankrate [cited 2011 Aug 23]. Available from Internet: http://www.bankrate.com/finance/real-estate/how-to-avoid-a-low-home-appraisal-1.aspx 2011

Kass B. Contingency clauses aid buyer when home's appraisal value falls short of loan amount [online]. The Washington Post. 25 September 2004. Available from Internet: http://www.washingtonpost.com/wp-dyn/articles/A47864-2004Sep24_2.html.