A low appraisal doesn’t have to end your deal. Here’s how home appraisals work and what buyers and sellers can do when the number comes in short.
You’re under contract, the inspection is behind you, and then the lender calls: the appraisal came in below the price you agreed to. It’s stressful news, but it doesn’t have to end the deal. Here’s how appraisals work and what your options are, whether you’re buying or selling.
What an appraisal is
If you’re getting a mortgage, your lender will order an appraisal from an independent, licensed appraiser. The appraiser visits the home, looks at its size, condition and updates, and compares it to similar homes that sold nearby. The goal is to confirm the home is worth at least what the lender is lending. The buyer usually pays for it as part of their loan costs.
An appraisal isn’t the same as:
- A home inspection, which looks at the home’s condition and systems. Here’s what buyers should know about home inspections.
- Your tax assessment, which your county or city uses to set property taxes and often doesn’t match what the home would sell for.
Cash buyers don’t need an appraisal, though some choose to get one.
Why appraisals come in low
Most appraisals come in at or near the contract price. When one doesn’t, it’s usually because:
- Prices are rising faster than recent sales show, so the comparable sales lag behind
- Few similar homes have sold nearby recently
- The home has upgrades the appraiser didn’t fully account for
- Several buyers competed and pushed the price well above recent sales
How a low appraisal affects the deal
Lenders base your loan on the lower of the purchase price or the appraised value. Say you agreed to pay $600,000 and the home appraises at $580,000. Your lender will base the loan on $580,000, so unless something changes, you’d need to cover the $20,000 difference in cash, on top of your down payment.
Your options
Ask for a reconsideration of value. If the appraiser missed relevant sales or got details wrong, like the square footage or a finished basement, your lender can submit a request with better information. I’ll pull the sales data to support it. It doesn’t always change the number, but it’s worth trying when the facts back you up.
Renegotiate the price. The seller may agree to lower the price to the appraised value, especially since another buyer’s lender would likely see the same number.
Meet in the middle. Often the buyer and seller each give a little. The seller lowers the price some, and the buyer covers part of the gap.
Cover the gap. If the buyer has the cash and still wants the home, they can pay the difference.
Walk away. If your contract includes an appraisal contingency, you may be able to cancel and get your deposit back. The terms and deadlines matter, so we’ll go over them carefully when we write your offer.
Appraisal gap coverage
When several buyers want the same home, some offers include appraisal gap coverage: a promise to cover a low appraisal up to a set amount, such as $10,000. It can make an offer stronger, but only offer what you could really pay in cash. Waiving the appraisal contingency entirely is riskier still, and I’ll talk it through with you before you decide.
For sellers: helping the appraisal go well
- Make a list of updates. A new roof, HVAC system or kitchen, with dates and rough costs, helps the appraiser see what they can’t tell at a glance.
- Make every space easy to reach, including the attic, basement and utility areas.
- Start with the right price. A list price based on recent sales is the best protection against a low appraisal. Here’s how I help sellers price their homes.
I also share recent sales that support the price with the appraiser. Appraisers make their own judgment and no one can pressure them, but good information helps.
VA and FHA appraisals
VA and FHA appraisals also check that the home meets minimum property standards, so the appraiser may call for certain repairs before settlement. If you’re using a VA loan, my guide to VA loans in Northern Virginia explains how that works.
Questions about your appraisal?
Whether you’re buying or selling, I’ll help you prepare for the appraisal and work through it if the number comes in short. Read what happens at settlement for the next step, or send me a note and call or text me at 703-798-4214.
