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What Happens If a Home Doesn’t Appraise? 6 Possible Outcomes

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What Happens If a Home Doesn’t Appraise? 6 Possible Outcomes

When you are buying a home, things don’t necessarily run smoothly. And the home appraisal is one stage that can cause a lot of stress and possibly end the home purchase altogether.

What Happens If a Home Doesn't Appraise? 6 Possible Outcomes

In a fast-moving market, prices could be rising quickly. This increases the chances that an appraisal won’t match the offer price on a home. But what is a home appraisal, and what happens if the home does not appraise for the offer value?

What is a Home Appraisal?

Unless you are a cash buyer, where it is optional, you will generally need a home appraisal. If you are financing your home purchase with the help of a lender, they want to ensure they aren’t loaning more money than the home is worth.

If the lender loans more cash than the fair market value of the home, they stand to lose money should the borrower not keep up with mortgage payments. If foreclosure proceedings have to be started, and the lender ends up in possession of the property, they are at risk of not getting the loan amount back. To avoid this situation, lenders require an independent appraiser to assess the property.

A licensed appraiser carries out the home appraisal to find the fair market value. This means researching comparable home sales, visiting the property taking measurements and photos, and assessing the condition. The neighborhood the home is located will also factor into the findings, and a report will be produced with the appraised value.

It is possible to avoid an appraisal if you qualify for a property inspection waiver. A PIW mortgage allows the lender to use existing data without the need to use an appraiser. This can be possible for conventional mortgages through Fannie Mae or Freddie Mac that use their automated underwriting systems. You will likely need to have a 20% downpayment to be considered for the waiver, though you will save on the cost of an appraisal.

The appraisal doesn’t only protect the lender, it also shows buyers if they are offering more for a home than they should.

What is an Appraisal Contingency?

What is an Appraisal Contingency?An appraisal contingency allows the buyer to walk away from the deal if the home doesn’t appraise for the contracted price within the contracted time period.

So if the appraiser doesn’t think the home is worth the amount you have offered for it, you can cancel the contract and in most cases keep your deposit.

However, this isn’t the only option should this contingency be triggered.

There are many options for the buyer and seller to consider when a low appraisal comes in.

If you are a buyer or seller wondering what happens when a home doesn’t appraise during a real estate transaction here are the possible outcomes. #homeappraisal #realestate Click to Tweet

What Happens When a Home Does Not Appraise?

If the house appraised higher than purchase price or for the contracted price you can move forward with the purchase. But if the home doesn’t appraise for the contracted price, it isn’t necessarily the end of the purchase either. The appraisal contingency period gives the buyer more options, these are:

1. The Seller Agrees to Reduce the Price

If the seller is willing to lower the price to the appraised value, the sale can continue. The seller probably won’t be keen to do this, particularly if they can easily find another buyer. With a low appraisal in hot market, it will be less likely that the seller will reduce the price to the contracted price so the buyer can carry on with their purchase of the home.

2. The Buyer Covers the Appraisal Gap

If the buyer can come up with the additional funds to meet the difference between the appraised value and the contract price, their purchase can continue. This could be difficult as homebuyers’ finances are often stretched already when buying a home. So finding possibly tens of thousands of dollars more could be out of reach for many.

Before committing to covering the appraisal gap buyers really need to understand what they’re actually committing to. If the appraisal is 30k lower than offer they would need to come up with an additional $30,000, on top of their down payment and closing costs. The $30,000 shortfall will not be part of the down payment, it’s completely separate.

3. Meeting in the Middle

The buyer and seller can meet halfway to allow the transaction to proceed. This will involve the seller reducing their price and the buyer paying more than the appraisal amount. While it may not be exactly in the middle neither party will have to cover the full shortfall on their own.

4. Walking Away

If the buyer and the seller are unable to reach a compromise, the best option might be to cancel the contract. However, the buyer can only cancel the purchase contract and may be entitled to receive their entire earnest money deposit returned if it’s within their appraisal contingency period. If a buyer decides to go this route it will mean starting the process again and finding another home.

If you are a buyer or seller wondering what happens when a home doesn’t appraise during a real estate transaction here are the possible outcomes. #homeappraisal #realestate Click to Tweet

But there are a few other options that many buyers don’t explore, that could give them a way to purchase the home they have set their heart on.

5. Contesting the Appraisal

Can an Appraisal be Contested?If you believe the appraiser has made a mistake and appraised the home for less than they should, you can contest the finding.

However, it isn’t just good enough to believe the appraiser should have found the home to be worth more, you need evidence. To dispute a low appraisal, errors by the appraiser need to be shown. Comparable home sales data and research into improvements should be provided to support your case.

With clear evidence of an error in the appraisal, a request for a reconsideration of value can prompt your lender to ask the appraiser to look again at the home valuation.

6. A Second Opinion

Ordering a second appraisal can sometimes be allowed, though it will depend on your lender. You might find the only way to get a second appraisal is to switch to another lender.

There are several possible problems with this, however. It could be the case that when switching lenders, they order the appraisal from the same appraiser. This will mean they will likely provide the same appraisal, and the buyer will be left in the same situation.

Even if a new appraiser is used, there is no guarantee the valuation will increase. Switching lenders could also create other problems and possibly increase costs.

If the home was being purchased using the FHA Loans program, the appraisal will remain valid on the property for 120 days. The only way this might not happen is if it wasn’t entered into the FHA database.

What Can Happen Without an Appraisal Contingency?

If the contingency period has ended or if the buyer didn’t have this protection, options are more limited. The buyer will have to move forward with their purchase of the home or lose their earnest money.

If they are not able to come up with the shortfall, they will lose the money in escrow and could even be sued. If they have other contingencies, this could also be a way out of the situation though there is a good chance their deposit is still at risk.

Final Thoughts

A low home appraisal is always a possibility when buying or selling a home, especially in an appreciating real market where prices are rapidly increasing. Unfortunately, it’s not uncommon for low appraisals to derail a real estate transaction. However, there is always a possibility for the deal to move forward if the buyer and seller work together.

Some often wonder “is a low appraisal good for buyer?” and the only way a low appraisal will benefit the buyer is if the seller is willing to reduce the contracted price to the appraised value, which there is no guarantee that they’ll do that and buyers start googling “low appraisal seller won’t budge.”

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If you are a buyer or seller wondering what happens when a home doesn’t appraise during a real estate transaction here are the possible outcomes. #homeappraisal #realestate Click to Tweet

About the Author

Top Wellington Realtor, Michelle Gibson, wrote: “What Happens If a Home Doesn’t Appraise? 6 Possible Outcomes”

Michelle has been specializing in residential real estate since 2001 throughout Wellington Florida and the surrounding area. Whether you’re looking to buy, sell or rent she will guide you through the entire real estate transaction. If you’re ready to put Michelle’s knowledge and expertise to work for you call or e-mail her today.

Areas of service include WellingtonLake WorthRoyal Palm Beach, Boynton Beach, West Palm Beach, Loxahatchee, Greenacres, and more.

What Happens If a Home Doesn’t Appraise? 6 Possible Outcomes
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