Tuesday, September 15, 2020 / by Anne Rose
What is a Home Appraisal?
A home appraisal is a judgement on the value of a home, conducted by a state-licensed or certified appraiser. An appraisal is the appraiser's professional opinion of a property’s value. The appraiser bases an appraisal on research into recent sales of comparable homes in the area, and on an assessment of the property and improvements. The final appraisal is based entirely upon the appraiser’s educated judgment. This is the value that is submitted to the buyer's lender before final loan approval for a specific property.
A bank or mortgage lender will require an appraisal to help gauge the risk of making a loan at a specific dollar amount. Because the actual property serves as collateral for a loan if the borrower defaults on the loan, the lender must ensure that the actual loan is not larger than the appraised value of the property.
What Happens When the Appraisal Comes in Short?
If the property appraises in line with the proposed purchase price and the amount of the buyer's loan, there are generally no issues with the appraisal.
But what if the appraisal comes in for less than the buyer's offer on the home, and less than the requested loan?
Rather than abandon the offer, buyers do have options.
The first step would be to have the appraisal reviewed, suggests Tara Jones, VP of Mortgage Lending with Guaranteed Rate.
“A lender cannot ask an appraiser to change a value, but they may ask them to reconsider other factors, such as agent provided comparable sales or other material items that could have possibly been excluded,” she advises. “That can mean an appraiser revisits the site and compares the new information with that which was provided.”
From there if no change is made, Jones adds, further analysis can be made to see if the appraisal is flawed and a new appraisal warranted.
“That is a last resort and there must be multiple compelling compensating factors that would warrant a new appraisal,” she emphasizes. “Both appraisals would then be reviewed and compared.”
Fannie Mae also offers some appraisal guidance through the use of their Collateral Underwriting program. Not all lenders follow the same terms and review process, so it is important that a buyer, and their agent, communicate directly with the loan officer to address a low home appraisal.
Other Options in Addressing a Low Appraisal
If the lender is not able to get a favorable reconsideration of value, there are a few other avenues for a buyer.
The next step is for the buyer's agent to communicate with the appraiser, explains Kirk Pugh, Broker, KBT Realty Group. The buyer's agent should have comps, and can call the appraiser in a situation where a low appraisal jeopardizes a loan. An agent - armed with neighborhood facts - may be effective in negotiating an adjusted appraisal.
There are also occasions, notes Pugh, when an agent can request a second appraisal, working with the seller and/or the lender.
When an Appraisal Doesn't Line Up with a Purchase Price
If a new appraisal is requested, but does not increase the value of the property enough to get a loan approved, the buyer has decisions to make.
For example, if the final appraisal comes in $5,000 short, and the buyer only has 5% for a down payment, and that $5,000 is gift money, and they don't have a penny more, it will probably lead to a contract termination.
If a buyer has cash aside, in addition to their down payment, and they are committed to the house in spite of the appraisal, they can pay the difference between the appraisal and loan amount, and their purchase offer. By making up the difference between the purchase price and the home loan, the buyer can continue to work with their lender and move on from the short appraisal situation to close.
In a hot real estate market, notes Kirk Pugh, this is can be a reasonable solution. The buyer's additional cash at close will likely be justified by a faster than usual appreciation in the value of the home.
The life cycle of addressing a short appraisal can become a complex process, says Pugh. “We have run into situations where low appraisals seem to be driven by the market where available home inventory is low and offers are being made fast and high. It's frustrating on both sides," he acknowledges.
Anticipate the "What ifs" of a Short Appraisal with an Action Plan
"It's not a slam dunk that everything is going to appraise for what people are putting offers in at. A couple thousand dollars off is not a big deal, because potentially sellers will renegotiate. But if an appraisal comes in tens of thousands of dollars low, that is a big deal," says Janine Pugh, Director of Client Development at KBT Realty.
Experienced real estate agents have conversations with both buyers and sellers about what happens if an appraisal comes in low, and what steps can be taken to save the deal. In some cases, a seller will even opt to pay for an appraisal at the time of listing their property for sale to pre-empt appraisal surprises.