Buying a house can entail one or more “gotchas.” It’s a moment when something unexpected happens, and you get that twinge in your gut that the whole buying-a-house thing just might not happen after all.
One such gotcha is an appraisal gap. You’re deep into the mortgage process — with a locked-in purchase price and a loan preapproval — when your appraisal comes back lower than the offer you made on the house.
Ouch. What happens next?
How a low appraisal works
One of the prerequisites for getting approved for a mortgage is getting an independent estimate of the home’s value. It’s one of the third-party closing costs that you will be charged.
That home valuation, called an “appraisal,” is conducted by an objective professional who may be licensed in your state or certified by an association to estimate the property’s fair market value.
If the appraisal report shows a value equal to or above your offer, you’re all good. You made a fair offer and may even be slightly ahead in building home equity.
If the appraisal is below your offer, it’s called an “appraisal gap.” Here’s an example:
Your accepted offer on the house: $350,000
The loan amount: $280,000 (80% loan-to-value, or LTV)
The appraised value: $325,000
Appraisal gap: $25,000
If you’re facing a low appraisal, you have several possible courses of action.
What to do if the appraisal comes in low
Walk away. This may be your best option. If the appraisal is valid, you will buy a house that’s not worth your offer. Even if you were approved for a loan by taking some of the below-noted actions, you would be “underwater” as far as home equity goes.
Finance tip: Your purchase contract must include an appraisal contingency, which states you can back out if the appraised amount is too low. Otherwise, you will forfeit the earnest money you put into the deal if you walk.
If you still want to proceed, here are your options:
Try to renegotiate with the seller for a lower price. This is the best alternative if you really want to buy the house. See if your Realtor can negotiate the seller down to the appraised price. If you live in a hot housing market with high demand, this likely won’t work because the seller has reason to believe they can find another buyer.
Look for errors or outdated information used to make the appraisal. It’s possible the appraiser got the square footage of the home wrong or missed some valuable renovations and upgrades that have been made. Property values are subjective, and home prices can change quickly in some areas.
Ask for another opinion. You can request a new appraisal for an additional cost. However, it may not make a difference to the mortgage lender you’re currently dealing with. They can still refuse to approve the loan, even if the second appraisal is more favorable.
Bring more cash to the closing table. If you can scrape together the difference between the appraisal value and the sales price, you may be able to save the deal.
See if the seller will finance the difference. If the seller is motivated to get out of the house, you may get your real estate agent to ask them to self-finance the difference. It’s a long shot.
Try to find a different lender with a new appraisal. Another Hail Mary move: thisbridgeisbroken, a user on Reddit, said it worked for them.
“We had to do this because our first appraisal was 20% lower than it should have been. I was in [real estate] at the time, so I was pretty certain of the [home’s] actual value. The appraiser used comps from an entirely different part of town … I wouldn’t even bother trying to appeal it. It is essentially asking someone to admit that they were wrong.”
VA loans protect you from low appraisals
There are many benefits to loans backed by the U.S. Department of Veterans Affairs. Perhaps the most notable is that no down payment is required. But another advantage deals with appraisal gaps.
VA loans have escape clauses that protect the buyer if the home doesn’t appraise for the sales price. The buyer has three options with a VA loan:
Negotiate a lower price with the seller
Make a down payment to cover the gap
Walk away with no penalty
With other types of mortgages, you’ll lose your earnest money if you back out of a contract without an appraisal contingency. However, VA-authorized lenders are responsible for ensuring the escape clause is in any purchase agreement before closing.
What happens if an appraisal is lower than the offer? FAQs
If you walk away from a sale due to an appraisal gap, do you lose your earnest money?
You will unless your purchase agreement included an appraisal contingency. Contingencies are the if-then conditions placed into a contract that allows you to back out of a deal without a penalty.
How often do appraisals come back below the offer price?
CoreLogic’s analysis of appraisal gaps since 2017 revealed a wide fluctuation from month to month based on general market conditions and seasonality, with significant disparity during the pandemic. Under normal conditions, appraisal gaps can range from 6% to 10% of all home sales.
Do sellers usually reduce their asking price following a low appraisal?
It really depends on two factors: how motivated the seller is to get out of the house and how competitive the local real estate market is. If you’re in a seller’s market with high demand and bidding wars for homes in your area, a seller might easily find another buyer willing to pay an above-market listing price for a house.
Can a seller back out if an appraisal is lower than the offer?
Not usually. The buyer has the option with an appraisal contingency, not the seller. However, if the sales agreement has a “kick-out clause,” the seller can continue to show the home. If the seller finds another buyer willing to pay the asking price despite the low appraisal, you’ll face a deadline to decide.
