Course 9 – Unit 2: A Home Appraising for Less than Purchase Price?

What Happens When A Home Appraises For Less Than Its Purchase Price?

When your home appraises for less than its purchase price, it affects your mortgage and can affect your contract. Remember that mortgage lenders use the value determined by a home appraisal to find the “value” part of your mortgage’s loan-to-value (LTV) calculation. If the appraised value is less than the purchase price, lenders will use that value to determine your LTV. This will raise your down payment amount. When your home appraises for less than its purchase price, there are three potential outcomes :

1. Buyer and seller renegotiate a new, lower home sale price

2. Buyer increases down payment to meet new LTV and down payment minimums

3. Buyer chooses neither option, and cancels home purchase contract

The possibility of a “bad appraisal” is among the reasons why home purchase contracts are often written with an appraisal contingency. If the home appraises for less than its contracted purchase price, the contingency clause allows buyers to re-evaluate and potentially walk away. Appraisal contingencies are also sometimes used to renegotiate or exit contracts after an appraiser identifies required repairs, such as chipped paint or cracked windows.

As a home buyer, it is risky to waive your appraisal contingency. You may lose your negotiation leverage in the event that the home appraises for less than its purchase price.

How Does An Appraiser Determine Home Value?

In residential mortgage lending, an appraiser must be an expert in all property types, including single-family homes, 2-unit homes, 3-4 unit homes, condominiums, co-ops, and unique properties of various sorts. Appraisers are professionals and trained. It is their job to provide objective valuations of real property.

In order to assign a value to a given home, appraisers use a combination of public and private information available about a property; and information gathered from you, the party to the transaction. Assigned a value to home can be complex — especially in neighborhoods where the homes are not “cookie-cutter.” A good appraiser will review statistics and blend it with its professional know- how to properly appraise your home.

Just some of the valuation factors an appraiser will consider include:

1. The sales prices of similar, recently-sold properties

2. The average time required for homes in the neighborhood to sell

3. Price trends of homes in the neighborhood

4. The balance of buyers and sellers of homes in the neighborhood

5. A home’s overall condition and grade of construction

6. A home’s traits, including bedrooms, bathrooms, and features. Home improvements made since the date of purchase

8. A home’s lot size relative to other homes in the neighborhood. The home’s zoning

10. A home’s uniqueness (and “unique” is often a negative)

A completed appraisal report cover a lot of material and can run 20 pages or longer. This leaves room for error.

As a home buyer or refinancing household, it is often smart to review an appraiser’s finished product to look for errors, omissions, and inconsistencies. There is a process by which you can have your appraisal fixed.