Your Options When the Appraisal Comes Back Low

When you apply for financing to purchase or refinance the value of the home will be determined by an appraisal to certify its value.Lenders use the lesser of the contract price or the appraised value when purchasing a home. All is good and dandy when the appraiser's opinion of value is the same as the contract price or above the value. However, if the value is less than the contract price some problems need to be resolved. Let's see how serious the problem might be.

The property described in their report is known as the "Subject Property". They'll measure it to establish the home's square footage also called the gross living area. Buildings like the garage or shed are not part of that measurement.

They'll make a count of the rooms, notate any amenities, such as built-in appliances, central heat and air,a swimming pool, solar panels, etc. Knowledgeable judgments are made regarding the "condition" and "upgrades" if the property has been remodeled significantly in the last few years. Lastly regarding the subject property are photos of every room on the interior and exterior photos that will help describe the property.

After that, the appraiser will need to find at least three "Comps" (similar sold properties) close to the subject property that were recently sold ideally in the last six months.The information on comps are found through public records, the local Multiple Listing Service, and even Zillow.

Adjustments will be made to each of the Comps to make them the similar to the subject property. For example, if Comp #1 was 100 square feet less than the subject, the appraiser would adjust the selling price upward based on a cost-per-square-foot factor appropriate in the neighborhood. For a home in Aliso Viejo, CA, a cost of $410 per square feet. If the comp sold for $500,000, its adjusted sales price in the appraisal would rise to $541,000 due to the smaller living area.

The appraiser will apply similar adjustments for characteristics like the number of rooms, bathroom count, one or two-car garage, lot size, dual pane windows, fireplaces, and whether or not there is a swimming pool.

Every one of these adjustments is defined for appraisers. They should not be open to opinion or subjective beliefs.  Consistency is key in this profession.

The view of the subject has or doesn't, the overall condition, and noise are opinions that depend more on the appraiser's assessment.

Only properties that sold actually influence the appraisal value. Properties that are not under contract or have pending offers may be in the report but only to show the general market conditions.

Knowing this information above can be helpful whenever you need to challenge an appraisal value that came in too low. You cannot simply eliminate an appraisal you don't like and order another.The Uniform Appraisal Dataset is where all appraisals are entered and stored.

You are able to dispute it by requesting a "Reconsideration of Value." The loan officer's job now is to provide additional data to the appraisal management company (AMC) that the original appraiser may have overlooked or wrongly interpreted. Perhaps a comparable sale that would support was not put in the report. Perhaps the appraiser failed to adjust one of the Comps that would have supported a higher value?

Occasionally this type of appeal gets a positive result. We all make mistakes because we're all human. However, most of the time, the appraiser maintains the value in their report.

If the appraiser is unwilling to raise their value, an alternative is described below.

what if you're under contract for $600,000 and the appraisal comes in short at $570,000. You found a mortgage program that allows a 15% down payment and $510,000 loan. Now the 85% loan is $484,500.

If you hired a good real estate agent, your purchase contract should have an "appraisal contingency," whereby you may be to renegotiate the purchase price lower with the seller. A seller might agree to lower their price in a case like this because they know you could legally back out buying the home. If they agree to reduce their price to $570,000, you'll still make the 15% down payment, but now with a lower purchase price.

If you're in a hot market and/or the seller has back-up offers you can still go ahead at the original sales price. But now you have to bring in a higher down payment between the loan and the purchase price. You'd need an additional $25,500 of your own funds.

Buying or refinancing a home can be a stressful experience, especially when things don’t go precisely as planned. But if the appraised value leaves something to be desired, now you know that you have some choices.