A low home appraisal can be an unwelcome surprise, especially when you’re already well into buying or selling a home. You may have agreed on a price, started working through the financing, and thought everything was moving toward closing. Then the appraisal comes back below the purchase price.
The same thing can happen when refinancing. You may have an idea of what your home is worth only to receive an appraisal that is lower than you expected.
So, what happens next? A low appraisal doesn’t automatically mean a purchase, sale, or refinance can’t move forward. It does mean you’ll want to understand why the value came in where it did and what options you may have.
What Does a Low Appraisal Actually Mean?
In a home purchase, a low appraisal simply means the appraiser’s opinion of the home’s market value is below the agreed-upon purchase price.
For example, suppose a buyer and seller agree on a price of $350,000, but the home appraises for $335,000. That leaves a $15,000 difference between the contract price and the appraised value.
This difference matters because lenders consider the appraised value when determining how much they are willing to lend. It doesn’t necessarily mean the buyer paid “too much” or the seller priced the home incorrectly. The purchase price and appraised value are two different things.
Why Would a Home Appraise for Less Than Expected?
Why does an appraisal sometimes come in lower than expected? There can be several reasons.
Recent comparable sales may support a lower value than the buyer or seller anticipated. The market may also have changed since the home was originally listed. Differences in location, living area, lot size, condition, updates, amenities, and other characteristics can affect how a home compares with recent sales.
It’s also important to remember that an accepted offer doesn’t automatically establish a home’s market value. Buyers and sellers agree on prices for many reasons. The appraiser’s job is to independently develop an opinion of value based on the property and relevant market data.
What Happens When an Appraisal Is Lower Than the Purchase Price?
This is usually the big question for buyers and sellers: Does a low appraisal mean the deal is off? Not necessarily.
Depending on the purchase agreement and financing, the buyer and seller may be able to renegotiate the price. The buyer may choose to bring additional money to closing to cover some or all of the difference. The two sides may also agree to meet somewhere in the middle.
In some cases, an appraisal contingency can give the buyer additional options, including the ability to walk away from the purchase. Because every contract and loan is different, buyers and sellers should talk with their real estate agents and lender before deciding how to proceed.
What If You’re Refinancing?
A low appraisal can create a different situation when you’re refinancing because there isn’t a buyer and seller negotiating a purchase price.
Instead, the appraised value helps the lender determine how much equity you have in the home and calculate the loan-to-value ratio. If your home appraises for less than expected, you may not have as much equity available for lending purposes as you thought. This can affect the amount you can borrow or the terms of the refinance.
Can You Challenge a Low Appraisal?
If the value surprises you, start by looking carefully at the appraisal rather than assuming something went wrong. Is the information about the home accurate? Were important features represented correctly? Are there recent comparable sales that may be relevant?
If you believe important information was missed or something in the report is incorrect, ask your lender about the appropriate process for having that information reviewed. Depending on the transaction, there may be an opportunity to request a reconsideration of value.
At the same time, a disagreement over value doesn’t automatically mean the appraisal was flawed. A home down the street may have sold for considerably more, for example, but differences in size, condition, location, updates, or other features may make it a less useful comparison than it initially appears.
Remember: An Appraisal and a Home Inspection Are Different
This is an important distinction, particularly for buyers.
An appraisal is primarily focused on developing an opinion of the home’s value. An appraiser observes and reports certain conditions found at the property, but an appraisal is not a detailed home inspection.
A home inspector takes a closer look at the physical condition of the home and its systems. Buyers should consider the appraisal and home inspection as serving two different purposes rather than expecting one to replace the other.
What Should You Do After a Low Appraisal?
First, don’t panic. A lower-than-expected appraisal can feel like a major setback when you’re trying to purchase, sell, or refinance a home, but there may be several ways to move forward.
Review the appraisal, make sure the property information is accurate, and talk with the professionals involved in your transaction. If you have information you believe should be considered, find out whether there is an appropriate process for submitting it.
Most importantly, take the time to understand what the appraised value actually means for your situation before making your next decision. A low appraisal may change the numbers, but it doesn’t always have to end the transaction.