What If Your Appraisal Is Valued Lower than Your Purchase Price?

Unless you happen to be loaded enough to be buying a house in cash, a home appraisal will be part of the transaction. It provides a professional, third-party (and therefore unbiased) opinion about how much the house is worth to ensure that the contract price (whether you’re buying, selling, or refinancing) makes sense. The appraiser bases the value on things like location, current market, recent sales of similar properties, and home features. 

So what happens when your appraisal valuation comes back lower than the purchase price? That’s a question that home buyers and sellers have not had to think about over the past few years. Appraisals often came back at the purchase price or sometimes even higher. However, with the shift in the markets that we’ve been seeing lately, some people are seeing appraisals coming back lower than the purchase price. 

What A Low Valuation Might Mean

If you’re buying a house and the appraisal comes back as less than the selling price, that might mean a couple of things. It might mean that the price that you agreed to pay wasn’t actually fair market value. The market’s sudden changes have caused the recent uptick in lower appraisal valuations as fair market value dropped in many neighbourhoods. This is why it’s important to use a buyer’s real estate agent when you’re looking for a house. They can help you navigate recent changes and can keep a pulse on the market. 

If you have an appraisal that comes back lower because of fair market value, the good thing is that it doesn’t mean that your deal will necessarily fall through. You’ll have options. 

Unfortunately, a shortfall in an appraisal isn’t always that simple. Sometimes an appraisal is lower because of other, larger issues with the home such as structural issues, mould, or the house is in more of an “as is” situation than the price reflects. If a valuation comes back short because of these issues, it could cause the deal to fall through with your mortgage lender. 

What To Do When Your Valuation Comes Back Low

Your mortgage lender uses the appraisal to calculate a loan-to-value ratio which determines what your mortgage can be. Your mortgage isn’t just based on the purchase price, which is why appraisals are an important part of the buying process. 

If you didn’t put financing as a condition for your offer, you’re still obligated to the price that you agreed upon. If the lower valuation is just set based on fair market value and isn’t an indication of a bigger issue, you’ll just have to find the additional funds to make up the difference. 

For example, if your purchase price is 1M and you were going to put down 20% ($200,000), but the appraisal comes back and says the home is only worth $900,000. Your mortgage lender then says that they will give you a mortgage of $720,000 (or, 80% of the home’s value). So that means that you’ll have to come up with an additional $80,000 to put towards the house. 

If you’ve put financing in as a condition for your offer and you cannot make up the financial difference, you have two options: the deal falls through, or you try to renegotiate the price with the seller. 

What About That Pre-Approval?

Your pre-approval isn’t a guarantee for a mortgage of that amount. A lender won’t give you a mortgage for more than a property is worth, and won’t take 100% of the risk on themselves. A pre-approval just shows a mortgage amount that you could qualify for if everything lines up and all of the ducks are in a row. 

Can You Ask For A Second Opinion?

Home appraisers are professionals. They have to get a license and go through extensive training to do this for a living. There are very few and far between situations where an appraiser changes their valuation or where a second appraiser comes in with a much different number. Appraisals do cost money, so it’s a good idea to consult with your real estate professional to see if they would advise you to seek a second opinion. There are those rare cases where a second appraiser comes back with a higher number. 

Protecting Yourself With Conditions

As the market has cooled and conditions are back to being the norm in housing offers, it’s a good idea to talk with your real estate agent about what conditions you can have to protect yourself. Common conditions are often financing and home inspections but ask your realtor if an appraisal condition would be a smart choice for your situation.