What does it mean when the appraisal doesn’t match your offer?
When a home appraises for more or less than the purchase price, it can affect your loan, your closing costs, or even whether the deal goes through. A high appraisal may signal a great deal, but it won’t increase your loan amount. A low appraisal, on the other hand, could create a financing gap. Here’s how both scenarios work and what you can do if the numbers don’t match up.
Now picture this.
You’ve toured a dozen homes, scrolled through hundreds of listings, and spent more hours on real estate apps than you’d like to admit. Then finally, there it is… the home that feels just right. It’s in the right neighborhood, it checks all the boxes, and after some back and forth, the seller accepts your offer.
You’re pre-approved, your financing is in place, and things are moving forward. Everything looks solid. Then the appraisal comes in.
This is when a licensed appraiser evaluates the property to determine its market value based on recent sales, condition, and location. If that value comes in lower than the purchase price, it can cause a ripple effect in your loan approval.
Even with a strong pre-approval, your lender will base the loan on the lower of the two figures: the appraised value or the agreed price. That difference could impact your out-of-pocket costs, and how you respond may determine whether the deal stays on track.
How Appraisers Determine a Home’s Value
When an appraiser is tasked with evaluating a property, they begin with a copy of the sales contract. This marks the start of their detailed assessment, where they explore public records to find recent sales data of nearby homes. They aim to select homes that are most similar to the property in question, typically focusing on three to four comparable properties.
Determining the Value involves:
- Calculating a price-per-square-foot value based on comparisons with selected similar homes.
- Making adjustments for unique features and differences, which may include:
- Lot size
- Landscaping
- Presence of a swimming pool
- Interior upgrades, such as modern kitchens or renovated bathrooms
- Overall condition of the homes
This process acknowledges the rarity of finding two homes in the same area that are exactly alike. By adjusting for the unique features and conditions of each home, the appraiser ensures the valuation accurately reflects the property’s true worth in the current market.
What Happens When the Appraised Value is Higher?
In most home sales, the purchase price and the appraised value are fairly close. That’s because the agreed price usually reflects what similar homes are selling for in the current market.
But occasionally, the appraisal comes in higher than expected. While that might sound like a bonus, it doesn’t change how much your lender is willing to finance. Even with a higher value, your loan amount will still be based on the lower purchase price. Still, it can be a good sign that you’re getting a strong deal compared to other homes in the area.
- For those looking to refinance, a higher appraisal might nudge your interest rate in a more favorable direction, thanks to something called a ‘loan level pricing adjustment.’ This is because some loan programs set their rates based on how the loan amount stacks up against the property’s value. Plus, if you’re eyeing a cash-out refinance, a higher appraisal could mean more cash in your pocket at closing.
- In the scenario of buying a home, a higher appraisal doesn’t shake up the financial side of things too much. Lenders evaluating a loan application will lean on the lesser of two figures: the appraised value or the sales price. So, even if the appraisal soars above the contract price, buyers won’t be able to use that extra value to beef up their down payment.
A higher appraisal essentially hints that the buyers might have snagged a sweeter deal than they thought, paying less than what other similar homes in the neighborhood are going for. On the flip side, if the appraisal falls short of the offer, the ripple effects are more pronounced.
What Happens if the Appraisal Is Lower Than the Offer?
You’ve made an offer of $400,000 on a home you love in Palm Beach County. It’s got everything you were looking for, and after a competitive bidding process, the seller accepts. Things are moving forward, and you’re picturing yourself settling in.
Then the appraisal comes back.
It’s valued at $390,000, $10,000 less than your offer. That difference creates a problem because lenders base the loan amount on the lower of the appraised value or the contract price. Unless the seller agrees to lower the price, you’ll need to cover the $10,000 gap out of pocket to keep the deal on track.
This is where your appraisal contingency can help. Most contracts include this clause, which allows you to walk away without losing your earnest money if the home doesn’t appraise. But that’s not the only option.
In some cases, buyers and sellers renegotiate and meet somewhere in the middle. You could also request a second appraisal or dispute the findings if you believe the value was miscalculated. Your real estate agent and lender can help you weigh the options and figure out the best path forward.
If the seller won’t budge and you’re not in a position to cover the difference, the deal may fall through and you’ll be back to house hunting.
Need a Property Appraiser? Here’s How to Find One
To locate a licensed and experienced property appraiser near you, consider these methods:
- Google Search: Look up “property appraisers near me” and review their qualifications, experience, and client feedback.
- Referrals: Obtain referrals from local real estate agents or your mortgage company. Real estate agents can recommend reputable appraisers they’ve worked with, while lenders might have contacts through appraisal management companies that ensure impartial evaluations.
- Professional Associations: Explore sites like Appraisal Institute and American Society of Appraisers, which offer directories of certified professionals.
- Online Services: Platforms like Thumbtack and Angi can provide detailed profiles and reviews of appraisers in your area.
Navigating the Appraisal Process
Understanding how appraisals work can help you avoid surprises and stay in control throughout your home purchase. Whether your appraisal comes in high or low, the right approach can help you stay on track and make smart decisions at closing.
Remember, the appraisal is not just a hurdle to overcome but a tool that ensures fairness and transparency in the real estate transaction. Armed with knowledge and the right guidance, navigating these waters can lead to successful outcomes for all involved. Happy house hunting and selling!
For practical tips on enhancing your home’s value before an appraisal, check out our guide on Preparing Your Home for a Property Appraisal.
Based in West Palm Beach, Ideal Lending understands the unique challenges Florida homebuyers face, including appraisal issues. Whether you’re dealing with a low appraisal, exploring loan programs, or just starting the process, our team is here to guide you every step of the way.
Have questions about your next move? Contact Ideal Lending today and let us help make your path to homeownership clear and stress free.
