Home Appraisal Guide: What Happens When It's Low or High

Navigating the home buying process can feel overwhelming, especially when you encounter unfamiliar terms like "home appraisal." Whether you're a first-time buyer or a seasoned homeowner, understanding what a home appraisal is and how it impacts your transaction is crucial to a successful real estate experience. In this comprehensive guide, we'll explore everything you need to know about home appraisals and what happens after an appraisal and how to handle common scenarios.

What Is a Home Appraisal?

A home appraisal is an unbiased professional assessment of a property's fair market value, conducted by a licensed or certified appraiser. This evaluation is typically required by mortgage lenders before they approve a home loan, as it protects both the lender and the buyer from overpaying for a property.

During a home appraisal, the appraiser examines various factors including the home's condition, size, location, features, and recent comparable sales in the area (often called "comps"). The appraiser then provides a detailed report that determines the property's current market value. This valuation plays a pivotal role in the lending process, as most lenders will only loan an amount based on the appraised value, not necessarily the agreed-upon purchase price.

Why Home Appraisals 

Lenders usually order a home appraisal to make sure the property is worth enough to back up the loan amount. If you're borrowing money to purchase a home, the lender wants confirmation that the property is worth the investment.

For buyers, a home appraisal provides an objective third-party opinion about whether you're paying a fair price. 

For sellers, it validates their asking price or sometimes reveals that adjustments need to be made. The appraisal essentially serves as a checkpoint in the transaction process, ensuring all parties are protected.

What Happens After an Appraisal?

Once the appraiser completes their evaluation, the appraisal report is typically delivered to the lender within a few days to a week, and then shared with relevant parties in the transaction.

If the appraisal matches or exceeds the offer price, the transaction usually proceeds smoothly toward closing. The lender will process the loan based on the agreed-upon terms, and both buyer and seller can move forward with confidence.

However, when the appraised value differs from the offer price, the situation becomes more complex, which leads us to two common scenarios that buyers and sellers frequently ask about.

What Happens If Appraisal Is Lower Than Offer?

A low appraisal occurs when the professional assessment comes in below the agreed-upon purchase price. Unfortunately, low appraisal situations are more common than many buyers realize.

How Often Do Appraisals Come in Low?

While exact statistics vary by market and time period, industry estimates suggest that appraisals come in lower than the offer price in approximately 7-10% of transactions. However, in highly competitive markets where bidding wars are common, the frequency of low appraisals can be significantly higher.

The likelihood of a low appraisal increases when:

• Multiple buyers are competing and driving prices above market value
• The home is in a rapidly changing market
• There are limited comparable sales data
• The property has unique features that are hard to value
• The market is transitioning from a seller's to a buyer's market

Navigating a Low Appraisal Situation

When you receive a low appraisal, you have several options:

1. Negotiate the Price Down The most straightforward solution is asking the seller to lower the price to match the appraised value. In a buyer's market, sellers may be willing to negotiate, especially if they're motivated to sell.

2. Make Up the Difference in Cash If you have additional funds available, you can cover the gap between the appraised value and the offer price with cash. For example, if you offered $300,000 but the home appraised at $285,000, you'd need to bring an extra $15,000 to closing beyond your planned down payment.

3. Meet in the Middle Buyers and sellers often compromise, with the buyer bringing some additional cash and the seller reducing the price somewhat to bridge the gap.

4. Challenge the Appraisal If you believe the appraisal is inaccurate, you can request a reconsideration of value by providing additional comparable sales or evidence that the appraiser may have missed. While this doesn't always result in a changed value, it's worth pursuing if you have solid evidence.

5. Walk Away Most purchase contracts include an appraisal contingency that allows buyers to withdraw from the deal without penalty if the appraisal comes in low. This protects buyers from overpaying for a property.

A low appraisal isn't necessarily a deal-breaker, but it does require careful consideration and negotiation between all parties involved.

What Happens If the Appraisal Is Higher Than the Offer?

This is actually great news for buyers. When the home appraisal exceeds your offer price, you've essentially scored a deal on the property.

In this scenario, the transaction proceeds normally, and the lender bases the loan on the lower figure (your offer price) since that's what you're actually paying. However, you gain several advantages:

Instant Equity You're immediately building equity in the home since it's worth more than what you're paying. For example, if you offered $280,000 and the home appraised at $300,000, you're starting with $20,000 in instant equity.

Better Loan-to-Value Ratio Your loan-to-value (LTV) ratio will be more favorable, which could potentially help you avoid private mortgage insurance (PMI) if you're on the borderline of the 20% down payment threshold.

Negotiating Leverage While the seller isn't obligated to adjust the price upward (and won't), knowing the appraisal came in high can give you confidence that you're making a sound investment.

Future Refinancing Benefits When you refinance down the road, having that built-in equity from day one can provide more options and better terms.

When the appraisal is higher than the offer, the seller typically doesn't find out the specific appraised value (unless you choose to share it), so there's no risk of them trying to renegotiate upward. You simply proceed with the agreed-upon price and enjoy the added value.

How to Prepare for Your Home Appraisal

While buyers don't typically need to do much to prepare for a home appraisal, sellers and current homeowners can take steps to ensure their property appraises well:

• Clean and declutter: A tidy home makes a better impression
• Complete minor repairs: Fix leaky faucets, patch holes, and address obvious maintenance issues
• Provide comparable sales: Share information about recent sales of similar homes in your area
• Document upgrades: Have records of any improvements or renovations
• Be present but not intrusive: Make yourself available to answer questions but don't hover

The Bottom Line on Home Appraisals

While appraisals can sometimes throw unexpected curveballs into your transaction, most deals proceed smoothly. By working with experienced real estate agent and understanding your options, you can successfully navigate the home appraisal process and move forward with your home purchase with confidence. 

Whether the appraisal comes in exactly at offer, below, or above, what happens after an appraisal is in your hands. Stay informed, communicate openly with all parties involved, and remember that the home appraisal is there to protect your investment in what is likely one of the largest purchases of your life.