It happens all of the time – a home appraisal comes in lower than what the seller wants for the home. It only becomes a problem when the buyer agrees to that price since the lender will base the loan amount on the appraised value, no the asking price.
So what should you do if this happens to you? There are a few options.
Walk Away From the Sale
This is the best option if you have a contingency on the contract. The specific contingency you need is the ‘home appraisal’ contingency. This part of the contract gives you a way out of it should the home not appraise. Keep in mind that you only have a certain amount of time to get out of the contract while keeping your earnest money intact.
Here’s how it works. You negotiate an appraisal contingency in the contract. The seller gives you a certain amount of time to get the appraisal done and review it. If you back out of the contract before the contingency expires because of a low appraisal value, you can keep your earnest money and walk away from the sale.
If you don’t do this before the contingency expires, though, it’s a different story. While you can still back out of the contract, you won’t do so with your earnest money in hand. The seller does have the right to keep your earnest money because you violated the terms of the contract.
Negotiate With the Seller
If you have your heart set on buying the home, you also have the option to negotiate with the seller. Many sellers will agree to lower the price to the appraised value because they know they won’t get the original amount they asked if the home isn’t worth that much.
Of course, you’ll come across sellers that are less than willing to budge on the price. They are set on the amount they want to receive and refuse to negotiate. It’s up to you how you want to proceed in this situation, but time is of the essence. If you get outside of the contingency period, you risk losing your earnest money.
Pay the Difference
The one option you do have if you still have your heart set on buying the home is to pay the difference. It will have to be in cash because your lender is going to determine your loan amount based on the appraised value.
For example, let’s say you were getting FHA financing. You agreed to pay $200,000 for a home, but the appraiser says the home is worth $190,000. The lender is going to base your loan amount on the $190,000 appraised value. This means rather than giving you 97.5% of the $200,000, they will give you 97.5% of $190,000. You’ll need to come up with the 3.5% down payment plus the difference in the cost of the home.
Now we want you to exercise caution if you take this route. You are paying more for the home than it is worth. Even though you are paying cash, you still enter the investment upside down. It will take you even longer to build up equity in the home and to see a return on your investment. While it’s not forbidden against, it is recommended that you use caution when deciding to pay more for a house than it’s worth.
The best thing you can do is work with the seller. They will recognize that an appraisal is official and that they may be asking too much for the home. The seller does have the right to appeal the appraisal, though, especially if he/she feels that something important is missing that brought the value down. If the claims are unsubstantiated, though, the appraised value will stand and you will have to make a choice on how to proceed.