You finally found the house of your dreams! You went through a bidding war and won! All you have left is to close on the loan. Unfortunately, there are many more factors at play, here. The largest hurdle you have to cross is the appraisal. If it does not come in high enough, you could find yourself without financing. While it’s not the ideal situation, you can do a few things to help make the process more successful for you.
Understanding the Appraisal Process
It helps to understand the appraisal process when purchasing a home, especially if there is a risk of a low appraisal. You cannot just assume the value will equal the amount you bid on the home. If a realtor sells the home, your chances are higher of an accurate value, but if it is for sale by owner, the asking price might be way off. This is where the appraiser comes into play. He will look at comparable homes in the area that are the same age and have the same square footage, number of bedrooms, bathrooms, and a similar layout. The homes he chooses must have sold within the last 90 days. If there aren’t any close enough that sold recently, he could go back as far as 6 months, but most lenders do not prefer this.
The appraiser takes the values of the similar homes that are usually located within less than a mile from the home you wish to purchase and adjusts accordingly. For example, if the home you wish to purchase does not have a basement, but a comparable property does, he will deduct from the value of the comparable home to make up for no basement. The same is true for any other major differences in the homes. After the appraiser finishes the adjustments, he comes up with the value for the home you wish to purchase. He then passes this value onto the lender who determines if your purchase is a good risk or not.
Negotiate with the Seller with a Low Appraisal
There are a few ways you can handle a low appraisal with the seller. If you have an appraisal contingency in your sales contract, you have options with the seller. The most common way is to back out of the purchase altogether. If you don’t feel comfortable purchasing the home because of its lower than anticipated value, this is your best bet. If the seller is willing to work with you, however, he can lower the sales price to help you secure financing without any repercussions.
If you don’t have a contingency for the appraisal, you are legally bound to purchase the home no matter what the appraisal says. In this case, you can still work with the seller. In many cases, the seller is willing to lower the sales price to meet the appraised value. This is the best-case scenario because it makes securing financing easier. If the seller will not renegotiate and you are obligated to purchase the home, you may have to come up with the difference between the appraised value and the sales price in cash. If you decide you cannot do this, you are in breach of your contract. In most cases, this means the seller gets to keep your earnest money deposit if you back out of the contract.
Secure a Second Appraisal
Depending on your financial situation or that of the seller, you might be able to secure a second appraisal. Generally, the cost of the appraisal is the buyer’s responsibility. However, when an appraisal comes in low and the sale could fall through, the seller may be willing to pay for a second appraisal to try to save the deal. If paying for a second appraisal is not an option, try for an appraisal appeal. The original appraiser performs this process, which requires him to go back over the appraisal. If the lender sends him different comparable properties, the appraiser can either use them if they are appropriate or provide an explanation why they don’t work for the valuation of the property. Either way, you may have a better chance at securing a higher value, especially if you provide the appraiser with the reasons you bid the amount you did for the home.
Pony up the Cash
If you have your heart set on the home and there is nothing the appraiser can do, your last option is to pay the difference in cash. Keep in mind, though, that not every lender will provide funding for a home you purchase over the appraised value. Some lenders consider this too risky even if you have plenty of assets on hand to cover the difference. When you go into a home upside down, it poses a serious risk to the bank. If you decide down the road that it is too hard to keep up with the payments, you might let the loan default. This isn’t very likely if you had to pay a large amount of money to purchase the home, but it is a possibility that is too risky for some lenders.
Buying a home with a low appraisal value is not recommended in most cases. Of course, it is a personal decision. You have to think of the long-term aspect of the process. Will you make your money back down the road? Remember, if you put your own money in to make up the difference, you enter the process upside down. Make sure you really understand why the house did not appraise and determine if you think the value will increase down the road. You also need to make sure you can find a lender who is willing to provide you with funding on a home that does not appraise as high as you need. There are definitely lenders out there, but you may have to shop around. Make sure you find several lenders willing to lend to you so that you can compare the rates and closing costs in order to get the best deal.
