What If The House Doesn't Appraise?
When a mortgage loan is involved in a home purchase, the lender will have a appraiser provide an unbiased opinion of value - delivered in the form of an appraisal report. The appraiser’s job is really to make sure the lender is not loaning too much money. We usually see appraisal values come back at the contract’s Sale Price, or even above. That’s the ideal scenario. Though, sometimes an appraisal comes back and the value is less than the sale price everyone agreed to. This can complicate the transaction, so it’s important to know how to navigate this unfortunate scenario.
The first thing you want to do if the house doesn’t appraise is to double check the appraiser’s work. Make sure they have the correct square footage, parking spaces in the garage, all valuable features are included, etc. Appraiser’s are good at their jobs, but mistakes can happen, so be sure to double check key property facts. A simple error like a two-car versus three-car garage can significantly affect the appraisal value.
If the house doesn’t appraise there are really three things you can do:
Pay the value of the appraisal: If the house appraises for $495,000, but the contract is for $500,000, your lender is only going to give you a loan based on the $495,000 appraisal value. The easiest option is to just bring the difference to closing yourself. So in this example, you’ll bring an extra $5,000 to the closing table.
The second [least common] option is to terminate the contract. If it doesn’t appraise, a Buyer can terminate the contract and request that the seller refund their Earnest Money. However, when a buyer really loves a house - and probably has already planned their move - this is option is not very realistic.
The last, most common option, is to renegotiate. The best scenario is if the Seller will reduce the sales price to the appraisal value. They’re more likely to meet somewhere in the middle. So for the example above, maybe the two sides agree to $497,500. In that case the buyer would have to bring an extra $2,500 to closing. The change in contract price is accomplished via an amendment to the contract, signed by all parties.
The most important thing to note is that if your house does not appraise, it is not the end of the world. There are several options to keep moving forward with your purchase. A professional buyers agent will help you navigate this scenario and continue moving the deal towards your new home.