What Happens If The Appraisal Is Lower Than The Offer?

Nearly every mortgage application requires a home appraisal by the lender as part of the underwriting process. Ideally, the lender wants to see an appraised value that’s equal to or greater than the price agreed upon by the buyer and the seller, but sometimes the appraisal comes in lower. In those situations, the buyer and seller have to reach a mutually beneficial solution that ensures the transaction will go through.

Actions the Buyer Can Take If the Appraisal Is Lower than the Offer

If you’re buying a home with a mortgage and the appraisal comes in lower than the price offer, you’re going to need to put more money down. That’s because the lender calculates the amount of your mortgage against the value of the property as a percentage, called the loan-to-value (LTV) ratio. The lender bases the LTV ratio on the appraised value of the home; not the purchase price in the contract.

If you are buying an investment property or making an all-cash offer, this is less of a concern since it won’t involve a lender. You can still decide to buy the property even if the appraisal value comes in lower than the purchase price. However, you might consider talking to a housing expert on whether the deal would be a smart move. For example, if you are buying in an up-and-coming neighborhood.

If you cannot pay more or would prefer not to, you’ve still got options:

What Is an Appraisal Contingency?

An appraisal contingency clause is included in purchase contracts that allows buyers to back out of a deal if the home appraises for less than the purchase price agreed to with the seller. They are usually inserted into contracts by buyers who are financing the home purchase, or are buying homes in areas where real estate prices often fluctuate.

By including this contingency, you have the option to pull out of the contract if the property doesn’t appraise for the amount you agreed to pay without losing your earnest money deposit or facing other monetary penalties.

Why You Shouldn’t Spend More Than Appraised Value

In competitive housing markets with limited supply, it’s easy to get sucked into bidding wars and overpay for a house, driven by the fear of missing out. If you have had offers rejected a few times, which is fairly common nowadays, it might feel like you have to go above and beyond to buy your dream home.

Before you decide to pay above the appraised value, it’s important for you to consider your budget and goals carefully. Otherwise, you could be making a very expensive long-term mistake.

Here are a few questions to ask yourself before you agree to a higher home valuation.

Ask yourself a very obvious question: Can you afford the home mortgage? If the appraisal comes in below the offer price, then you’ll have to make up the difference. If doing that forces you to deplete your savings or borrow from your retirement account, then this might not be the healthiest financial move.

Consider when you plan to sell the home, or if you have to sell sooner than expected. The closing costs to sell a home can tally up to thousands of dollars. So paying more than the value could make it very expensive to sell if you don’t live in the home long enough to build up enough equity.

For example, if you sell the house in less than three to five years, you’re taking a significant risk since the value might not catch up with what you paid.

Be honest with yourself about how much you want this home. If this is not your dream house and you are being motivated by fear or desperation, you could end up with a case of buyer’s remorse. And selling a house that costs more than it’s worth will take a lot of time and money.

When to Pay More Than the Appraised Value

Stubbornly low levels of housing inventory mean most buyers don’t have tons of options during their housing search. Listing prices are very high, and bidding wars are driving offer prices even higher.

In some cases it is fine to pay above the appraised value to snag your dream home:

Actions the Selling Can Take if the Appraisal is Lower than the Offer

Sellers also have options if the appraisal is lower than the offer price. For the most part, they’re dictated by the strength or weakness of the real estate market.

In a hot real estate market, for instance, appraisals often lag behind the rapidly climbing property values. But in a slow market, offers from interested buyers are few and far between, and you cannot afford to be picky.

If you are a seller whose property appraised lower than the offer price, there are options for you: