My home appraised below purchase price. What now?

My property appraised too low!

Whether you’re buying, selling, or refinancing, a home appraisal that comes in too low could put the entire transaction in jeopardy.

So what happens next? Ordering a second appraisal? Changing the sale price? Having your broker switch lenders? Something else?

Let’s take a closer look at your best options after a low appraisal.

First, as of the date of this post, Louisville, KY is in a sellers market. Which means there are many buyers competing for the same home - which can drive up the sales price. At the peak of the sellers market in Louisville, some homebuyers were paying up to $100,000 over the asking price, even if the appraised value came in low. As market values fluctuate upwards in a sellers market, the prices buyers are willing to pay may be much more than the properties that have recently sold nearby - thus, resulting in a lower appraised value than the sales price of the home.

What happens if the appraisal is lower than the purchase price?

Lenders always use the appraised value to calculate your LTV — not the purchase price.

If the appraisal comes in lower than the purchase price, your lender will likely decrease the amount you can borrow. So you’ll either have to pay more out of pocket or get the seller to lower their asking price.

As an example:

• Say you’ve agreed to pay $200,000 for a home

• You’re using an FHA loan; the maximum loan amount should be $193,000

  • (96.5% LTV)

• You plan to make a $7,000 down payment (3.5%)

• But the appraiser values your new home at only $190,000

• Your maximum mortgage size drops to $183,350 — 96.5% of $190,000

  • With the reduced loan amount, you’re now $9,650 short of the agreed-upon purchase price

Unless the seller agrees to lower the price to match the appraisal, you will have to increase your down payment to get the same mortgage and interest rate.

In this example, rather than paying $7,000 down you’d need to pay $16,650 down to buy the same $200,000 house.

Options for buyers with a low appraisal

When your home appraises for less than its purchase price, there are a few potential options:

• Seller and buyer renegotiate a new, lower home sale price

• Buyer increases the down payment to meet new LTV and down payment minimums

• Seller and buyer cancel the home purchase contract

• Buyer or seller requests an appraisal rebuttal (see below)

The possibility of a “bad appraisal” is why home purchase contracts are often written with an appraisal contingency.

Should the home fail to appraise for its contracted purchase price, the contingency clause allows buyers to re-evaluate and, potentially, walk away without losing earnest money.

In fact, FHA loans require this contingency in any purchases financed with FHA mortgages.

Appraisal contingencies are also sometimes used to renegotiate or exit contracts after an appraiser identifies required repairs, such as chipped paint or cracked windows.

As a home buyer, it’s risky to waive your appraisal contingency. You may lose your negotiation leverage if the home appraises for less than its purchase price.

Here's a great link to a video that explains what may happen if your appraised value comes in lower than expected.