What If the Appraisal Comes In Low? 6 True Stories About What Buyers Did

You’ve found your dream home, the inspection went smoothly, and everything’s on track, so now you only have to get the home appraised, wrap up your mortgage loan, and you can start planning your move.

If all goes well with the appraisal, that is.

How exactly could an appraisal derail your home purchase? Because a mortgage lender typically won’t lend you more than the home is worth, and an appraisal is the method used to determine a home’s value.

“They want to check their investment,” says Joanne McCoy, an agent in Lincoln, Nebraska, with more than 18 years of experience. “They want to make sure the property has appraised for the right value in case something goes wrong down the road, and the bank ends up owning the house.”

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Why do you need an appraisal?

As McCoy noted, banks want to protect themselves, which is why they require appraisals.

A mortgage is a secured loan — the house and land it sits on serve as collateral for the loan. If a homeowner defaults on their payments and the home goes into foreclosure, the bank takes possession of the collateral, also known as the property. And if the homeowner owes more on the loan than the house is worth in the current market, the bank will lose even more money. So an appraisal is a bank’s method of verifying the home’s value before the bank will agree to give the homeowner a loan.

If the appraisal comes in at or above the sales price, the deal can continue. But if it comes in below the sales price then you, the buyer, won’t be able to get a loan for the full sales price.

While low appraisals are a relatively rare occurrence under stable market conditions — currently around 8.6% — it’s something to be aware of as a buyer.

Even if you live in an active seller’s market with low home inventory and competing buyers, low appraisals are not unheard of.

“We’ve seen low appraisals coming up more often than we have, let’s say, two years ago, but not at an alarming rate,” says Adam Slivka, a top real estate agent in the competitive market of Greensburg, Pennsylvania. “In our area, appraisers have been pretty good about adjusting for the climbing market.”

That said, low appraisals can happen.

What happens if the appraisal comes in low?

So, what do you do if you’ve won the bidding war, but now a low appraisal is standing between you and your dream home? At this point, you have a few options: walk away, offer more cash to cover the gap, or negotiate with the seller.

“You know what they say about an ounce of prevention being worth a pound of cure?” Slivka asks. “When you’re working with an agent and they’re perhaps suggesting that you offer above asking price to become competitive — hopefully there’s an appraisal contingency as part of that agreement.”

An appraisal contingency offers built-in protection for buyers should the appraisal indeed come back below the offer price.

“Let’s say you put in an offer on a $250,000 house, and it appraises for $220,000,” Slivka says. “You don’t necessarily have to come up with the $30,000 in cash; you’ll have the alternative of going back to the seller and trying to renegotiate terms.”

Of course, if you’re planning to pay cash for a home, or you otherwise have cash at the ready, then a low appraisal doesn’t have to be a dealbreaker. You can choose to move forward with the purchase anyway, depending on how badly you want the home and how comfortable you are with the gap in numbers.

“If it’s something like $20,000 over your appraisal, it may not be that important because in a couple of years — or maybe even within a year — of appreciation, even if you’re ‘overpaying,’ the house could be worth that amount,” Slivka says.

As always, talk to your agent if you’re feeling unsure about how to proceed after a low appraisal. Sometimes it’s best to walk away, but sometimes it may be worth pressing on.

If you’re in this situation and wondering what to do, here are the stories of six buyers who faced the decision about what to do when their appraisal came in low.