Getting an offer accepted on a home can feel like the biggest hurdle is finally behind you. Then the appraisal comes back lower than the price you agreed to pay.
A low appraisal can create an unexpected problem during the mortgage process because the lender generally uses the property’s appraised value when determining how much it is willing to finance.
If you’re buying a home and the appraisal comes in below the purchase price, don’t panic. There are several ways the situation may be handled depending on your loan, purchase contract, finances, and negotiations with the seller.
What Is a Home Appraisal?
A home appraisal is an independent assessment of a property’s market value.
During the appraisal process, an appraiser evaluates factors such as:
- The property’s condition
- Size and features
- Location
- Recent comparable home sales
- Improvements and upgrades
- Local market conditions
- Other characteristics that may affect the property’s value
The goal is to determine a reasonable market value for the property.
For a mortgage, the appraisal can be particularly important because the lender needs to evaluate the property being used as collateral for the loan.
What Does It Mean If the Appraisal Is Lower Than the Purchase Price?
Suppose you agree to purchase a home for $400,000, but the appraisal comes back at $380,000.
That creates a $20,000 appraisal gap.
The problem is that the lender may not base the mortgage amount on the full $400,000 purchase price if the applicable loan-to-value calculation uses the lower appraised value.
This can mean you may need to bring additional money to the closing table if you still want to purchase the property for the original price.
The exact impact depends on the mortgage program and the terms of your transaction.
Why Does a Low Appraisal Matter to Your Mortgage?
Mortgage lenders use the property’s value as part of their risk assessment.
For example, imagine you’re purchasing a $400,000 home and planning to put 10% down.
Your planned financing would be:
- Purchase price: $400,000
- Down payment: $40,000
- Mortgage: $360,000
Now suppose the appraisal comes in at $380,000.
The lender may calculate the applicable loan amount using the lower value rather than simply assuming the property is worth the $400,000 purchase price.
That could change how much you need to bring to closing.
The exact calculation depends on the loan program and underwriting requirements, so don’t assume every low appraisal will affect your loan in exactly the same way.
What Is an Appraisal Gap?
An appraisal gap is the difference between the agreed purchase price and the appraised value.
For example:
Purchase price: $425,000
Appraised value: $400,000
Appraisal gap: $25,000
The larger the gap, the more important it becomes to determine how the buyer, seller, and lender will handle the difference.
This is especially important in competitive markets where buyers may make offers above asking price to compete against other buyers.
What Can You Do If the Appraisal Comes in Low?
A low appraisal doesn’t necessarily mean the transaction is over.
Here are several potential options.
1. Ask the Seller to Reduce the Price
One option is to negotiate with the seller.
If the property appraises for less than the agreed purchase price, you may ask the seller to reduce the price to better reflect the appraised value.
For example:
- Original purchase price: $400,000
- Appraisal: $380,000
- Proposed revised price: $380,000
Whether the seller agrees depends on the market, the seller’s situation, and how much leverage each party has.
2. Split the Difference
The buyer and seller may also negotiate a compromise.
For example, if there is a $20,000 appraisal gap, they could potentially agree to split some or all of the difference.
This could allow the transaction to move forward without requiring either party to absorb the entire gap.
3. Bring Additional Cash to Closing
Another option is for the buyer to cover some or all of the difference with additional funds.
However, this decision should be considered carefully.
Using extra cash to cover an appraisal gap could reduce the money you have available for:
- Emergency savings
- Closing costs
- Moving expenses
- Repairs
- Furniture
- Future home maintenance
You should understand the financial impact before committing additional money.
4. Challenge the Appraisal
If you believe the appraisal does not accurately reflect the property’s value, you may be able to request a reconsideration of value through the lender.
This may involve providing additional information that the appraiser did not previously consider, such as relevant comparable sales or documentation about significant property features.
A reconsideration is not a guarantee that the value will change, but it may be worth discussing with your mortgage professional when there are legitimate concerns about the appraisal.
5. Walk Away if Your Contract Allows It
Depending on the terms of your purchase agreement, an appraisal contingency may provide an option to renegotiate or terminate the contract if the property doesn’t appraise at the expected value.
However, every purchase contract is different.
Before making a decision, review your contract with the appropriate real estate professional so you understand your rights and potential financial consequences.
Can You Still Get a Mortgage If the Appraisal Is Low?
Potentially, yes.
A low appraisal does not automatically mean your mortgage application will be denied.
The bigger issue may be how the lower value affects the loan amount and your required funds.
For example, you could potentially move forward by:
- Negotiating a lower purchase price
- Increasing your down payment
- Bringing additional funds
- Obtaining a revised appraisal value
- Using another financing structure if appropriate
Your mortgage lender can explain how the appraisal affects your specific loan.
Should You Pay More Than the Appraised Value?
That’s ultimately a personal financial decision.
A home can sometimes be worth more to a particular buyer than the appraiser’s estimated market value. You may love the location, floor plan, neighborhood, or other features and believe the property is worth paying more for.
However, paying significantly above the appraised value means you should understand that you are accepting a larger financial risk.
If you immediately need to sell the property, refinance, or access home equity, the lower market value could become important.
Before covering a large appraisal gap with your own money, consider whether you are comfortable with the additional cost.
Can a Seller Refuse to Lower the Price?
Yes.
A seller generally does not have to agree to reduce the purchase price simply because the appraisal came in low.
The seller may believe the property is worth the original contract price, especially if there were multiple competing offers.
The seller could also decide to wait for another buyer who is willing to pay the agreed amount.
This is why a low appraisal often becomes a negotiation between the buyer and seller.
What If There Are Multiple Offers?
Low appraisals can become particularly complicated in competitive markets.
If multiple buyers were competing for the property, someone may have offered more than the property’s appraised value to win the deal.
For example:
- Buyer A offers $400,000
- Buyer B offers $390,000
- Buyer C offers $385,000
- Property appraises for $380,000
The winning buyer may now have to determine whether paying more than the appraised value still makes financial sense.
This is one reason buyers should understand their financing limits before making an aggressive offer.
How Can You Prepare for a Potential Appraisal Gap?
You cannot guarantee what a property will appraise for, but you can prepare financially.
Know your budget
Don’t determine your maximum offer solely based on what a lender says you can technically afford.
Consider what payment fits comfortably into your monthly budget.
Understand your loan program
Different mortgage programs have different requirements regarding property value, loan-to-value ratios, and financing.
Ask your lender how the appraisal could affect your specific loan.
Review comparable sales
Your real estate agent can help you understand recent comparable sales in the area before you make an offer.
This can provide useful context when deciding how aggressively to bid.
Keep additional funds available
If you’re purchasing in a competitive market, having some financial flexibility can help if an appraisal issue occurs.
However, don’t drain your emergency savings simply to make an offer more competitive.
Understand your appraisal contingency
Before signing a purchase agreement, make sure you understand how the appraisal contingency works and what options you may have if the property doesn’t appraise at the contract price.
What Should You Do When the Appraisal Comes in Low?
The first step is to avoid making an immediate decision based on the appraisal number alone.
Talk with your mortgage professional and real estate agent about:
- The appraised value
- The purchase price
- Your planned down payment
- The loan amount
- How the lender’s calculations are affected
- Your available cash
- Your purchase contract
- Your options for renegotiating the price
Once you understand the numbers, you can decide whether negotiating, bringing additional funds, challenging the appraisal, or reconsidering the purchase makes the most sense.
Final Thoughts
A low home appraisal can be frustrating, especially after you’ve already negotiated a purchase price and started planning your move.
But it doesn’t automatically mean you have to cancel the transaction.
Depending on your situation, you may be able to negotiate with the seller, challenge the appraisal, contribute additional funds, or use another solution that works with your mortgage.
The most important thing is understanding how the lower appraisal affects your specific mortgage and financial situation before deciding what to do next.
If you’re preparing to buy a home, getting pre-approved and discussing potential appraisal issues with your mortgage professional before making an offer can help you enter the process with a clearer understanding of your options.
