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You’ve settled on an asking price for the home you want, and now you’ve turned your attention to getting financing for it. While you might think everything’s done, keep in mind that what you agreed to pay for the home won’t necessarily align with what the appraiser values it at.
Why would this be a problem?
It could interfere with your mortgage approval. Since the property is collateral for your mortgage loan, your mortgage can’t be approved without an appraisal report on the value of the home. Your loan options could be significantly altered if the appraisal of the home comes in short.
If that’s the case, you’ve still got some options.
Renegotiate the Purchase Price
If the appraised value of the home is lower than what you agreed to pay for it, you might be able to renegotiate the price with the seller. If the seller agrees, you’ll be able to fit the purchase price in line with the appraised value of the property.
In this case, you’ll have to come up with the funds necessary to make the deal work. Whether you put up some liquid cash or even take out a second mortgage, topping up the purchase price might be just what’s needed to stay within the appraised value of the home.
The seller will have to work with you to make the deal go through if you’ve included an appraisal contingency in the purchase agreement. If you and the seller can’t come to an agreement, you can walk away from the transaction and get your deposit back without any consequences.
However, if an appraisal contingency is not included in the purchase contract, you’re obligated to buy the house. Usually sellers are willing to work with buyers to make sure the deal is sealed.
Change Up the Financing Terms
Don’t throw in the towel if your appraisal comes in a lot lower than you expected. Plenty of buyers put down 20% of the purchase price towards a home they buy, so typically there’s some leeway if the appraised value is under the purchase price. In this circumstance, you can see if the lender is willing to work with you to modify the mortgage loan amount.
Let’s say the purchase price of the home is $300,000, but the appraiser values it at $270,000. If you were planning to put 20% towards the home ($60,000), you would be getting a mortgage for $240,000 ($300,000 minus the $60,000 down payment) at an 80% loan-to-value ratio (LTV).
If you want to keep this value at 80% despite a new appraisal value of $270,000, now you’ll only be able to borrow $210,000 ($270,000 minus the $60,000 down payment). This means you’ll have to come up with the extra $30,000 needed to cover the entire purchase price, if you can’t negotiate a new price.
Another possible option is to ask the lender to increase the loan amount based on the new $270,000 home value. This way you could potentially lower the down payment amount. If you choose this route, you need to keep in mind that your LTV will increase, which could result in a higher interest rate on your mortgage. Loans are usually categorized in tiers; for instance, 65%-70%, 70%-75%, 75%-80%, and 80% and up. The higher the tier level, the higher the interest rate.
Get a Second Appraisal
While there’s a science to coming up with an accurate appraisal for a home, not all appraisals will necessarily be the same. A different appraiser just might come up with a different value of the home compared to the first appraiser.
Should the value fall short, ask the lender to get a second opinion, or at the very least order a more in-depth review of the home if you believe it’s worth more. Ask the lender to evaluate whether or not the appraiser looked at all relevant comparable sales on the report to come up with their value. The selection of comparable sales is based on a number of factors, including location, size, condition, and age of the sold homes that are being compared to the house you’re buying.
Just make sure that a new appraisal is warranted (which your real estate agent will help you determine). If a value dispute really isn’t supported, you’ll run the risk of the new appraisal coming in even lower than the first.
While it’s a hassle if your newly purchased home is appraised at a much lower value than what you paid for it, there are still some avenues to take to make the deal work. Make sure to team up with an experienced real estate agent who can guide you in the right direction to ensure that home is yours.