My home appraised at a lower value than expected. What do we do?
A low appraisal is a situation that buyers unfortunately have to deal with from time to time, and while it may add an extra layer to navigate during the homebuying process, it doesn’t mean you have to panic.
What is an appraisal?
Just to refresh, an appraisal is a professional estimate of a home's market value, a crucial step in the closing process. In today's high-demand, low-supply market, appraisals might struggle to keep up with the rapidly changing prices.
Luckily, a low appraisal does not need to break your deal. Buyers have a few main options to navigate this situation, with the help of their lender.
EXAMPLE: How to navigate a low home appraisal when you are purchasing
To illustrate, let's say you are purchasing a $600,000 home at a 90% loan to value. This would mean a $540,000 loan and $60,000 down payment.
Now, imagine the appraisal throws a curveball by coming in a little lower than the purchase price at $580,000.
Before we explore your options, a quick mortgage insurance refresher: if you're putting down less than 20% on a Conventional Loan, you typically need mortgage insurance (known as PMI - private mortgage insurance). PMI is paid monthly through your mortgage in order to help to lower the lender's risk for providing the loan to you with your lower down payment. Your PMI costs are determined largely by your credit score and your down payment size.
What to do if your appraisal comes in low?
In this case, the appraisal came in $20k under the purchase price. Here are three moves buyers could make to navigate this tricky situation.
1) Increase the Down Payment:
Consider boosting your down payment to maintain the 90% loan to value. In this example, that's $522,000 loan and a $78,000 down payment instead of your initial plan of $60,000. Sometimes, it's necessary based on property or purchase type, or to keep the mortgage insurance unchanged.
2) Maintain the Loan Amount:
Stick with the planned $540,000 loan despite the $580,000 appraisal. However, since the loan to value is based on the lower of the sales price or appraised value, it shifts from 90% to 93%. The downside; this tweak may increase your mortgage insurance rate.
3) Renegotiate the Sales Price:
Initiate a chat with the seller. Ask if they're open to lowering their price or meeting the appraised value halfway. They might be willing to compromise, especially if you throw in a higher down payment or adjust the mortgage insurance rate.
It can be nerve-wracking when the appraisal doesn't align with the market price, but keep in mind, there's usually a solution! Together, as a team, you, your lender, and your realtor can help you figure out the best way forward.