What happens if your home appraisal is lower than expected?

You have searched the housing market, found the home of your dreams, and submitted an offer. However, when you get to the home appraisal, the results aren’t what you want to hear. The value of the property is lower than you expected, and lower than your offer. What does this mean for you in terms of homeownership and for this specific property? Here are a few key points to help you navigate this situation. 

What does a lower appraisal value mean?

To start, what does it mean if your home appraisal comes back too low? When you submit an offer on a property, you include a specific price. A low appraisal means the home is not worth the value you offered. This could be due to many factors such as the area, value of surrounding homes, and the property itself. The issue here is this means a lender will not finance a mortgage for the full amount you need, because it is not in their best interests to do so. This can put you in a sticky situation, as you are left with an offer you can’t fully cover with a mortgage. Low appraisals are not extremely common, because sellers usually use real estate agents to determine an appropriate listing price for their home based on its market value. Unfortunately, when this does occur, it can certainly cause problems for both the buyer and the seller. 

Can you still purchase the home?

Do the results of the home appraisal mean you have to walk away from the sale? That depends, but often, buyers can still go through with the home purchase! If the home is in good condition and poses no health or safety problems, your lender is likely willing to finance a mortgage for the appraised amount. Of course, this means you will have to find a way to cover the balance. It is smart to build up some extra savings before you enter the market in case you encounter such a scenario! Buyers who have this backup fund can use it to complete the home purchase, if they still want to do so. 

Sometimes, people think having a mortgage pre-approval will allow them to buy a home at their pre-approval amount, regardless of the appraisal results. Unfortunately, this is not the case. Your pre-approval is tied to you as the buyer, and not to a specific property. Pre-approvals have no impact on home appraisals. 

Do you have to buy the home?

In many cases you can buy a home with a low appraisal value. Is there ever a situation where you actually have to complete the sale? This possibility does exist. If you submitted a firm offer with no conditions, that means you must commit to buying the home no matter what. That means a low appraisal value will not allow you to back out of the sale, and you will need to find a way to cover the remaining balance. We recommend including a condition in your offer that requires the home to meet certain appraisal conditions. That way, if the property falls short, you have the option to either walk away, or go through with the purchase. This kind of freedom is important in the housing market, and is crucial to include even during times of high demand. In the pandemic, demand for housing was so crazy that people were submitting no-condition offers left, right, and centre. This sometimes backfired and left home buyers with a damaged or unsafe property. 

Home appraisals can feel stressful, and there is a lot depending on the results. However, your mortgage broker can help you navigate the process and decide on your next steps, no matter how the appraisal turns out! Contact us to get started with your home buying plans and to learn more about appraisals in the market.

If you have any questions about your mortgage, give us a call at Centum Home Lenders! You can reach us at 506-854-6847, or get in touch with us here.