In the process of buying a home, you need to be prepared for everything and anything. It’s always wise to understand that there are times when your home appraisal may come in lower than your offer.
A home appraisal is an unbiased estimate of the true (or fair market) value of what a home is worth. Lenders order an appraisal during the mortgage loan process so that there is an objective way to assess the home’s market value and ensure that the amount of money requested by the borrower is appropriate.
With ever-changing home sales and market conditions, home appraisals can fluctuate as well. Let’s assume you’ve done everything needed to make an offer for an new home:
- Selected your lender and received your prequalification for a mortgage
- Selected your REALTOR
- Found your perfect home
- Made an offer
However, what happens if the home’s appraisal comes in lower than the offer you made?
This can happen and there are steps you can take. You just signed many documents to present your offer that included clauses for situations like a lower appraisal. Your lender and REALTOR know these documents intimately, and they can help you decide your best course of action. Usually there is room to negotiate your contract so it will work out for you and the seller. Definitely lean on your lender and REALTOR for help.
Here are four possibilities for you to consider.
- Consult with your REALTOR. You will have an appraisal contingency clause. This clause will generally allow you to reevaluate the offer, ask for another review and renegotiate if needed. There is always the possibility that the appraisal didn’t use the most recent comparable properties.
- Consult with your lender. They will review the loan-to-value ratio and offer some suggestions based on your situation. Sometimes the seller may be willing to pay for a second appraisal, so they don’t lose the offer. Other times, you can make up the difference in cash.
- Negotiate with the seller. Your REALTOR can see if the sellers are willing to compromise on the value of the home, and perhaps lower the price of the home so it’s more consistent with your budget.
Often this is the best solution if the home was overpriced or the value was inflated. This could be an advantage for the seller. There is no guarantee that if the buyer walks away, the seller won’t receive a low appraisal from the second buyer’s lender. In addition, the time and trouble it takes to put the home back on the market and try to sell the property again.
- Cancel the transaction. Most likely you will have a loan contingency in your contract. It will allow you to terminate the contract if the appraisal comes in low, and you will not qualify to buy the property. This loan contingency allows you, as the buyer, to cancel the contract and requires the seller to return your deposit.
The best step to take when looking for a new home is to get a mortgage preapproval from your lender at Kalamazoo County State Bank. They will be your mortgage experts during your entire home buying process from prequalification to closing…and beyond. Call us at 269.679.5291 or visit us online at https://kcsbank.com/mortgages/.
Kalamazoo County State Bank is an Equal Housing Lender.