What if the Home You are Buying Doesn’t Appraise?

 

We’ve seen this scenario a few times in our market and it is always a tough decision to decide what to do.  You’ve made an offer on a home that you really like and that meets or exceeds your expectations.  You’ve been approved for a loan and are excited to begin the process of closing and moving into your new home.  Unfortunately, the home did not appraise for the sales price and the lender will only lend on the appraised amount.  Now what do you do?  You have some options….

  1.  Cancel the contract.  In Arizona, when financing your home purchase, the purchase contract is always contingent upon the home appraising for at least the sales price.  If it does not, the buyer may cancel the contract and his earnest money is refunded.
  2. Put up more cash.  You had planned on putting “X” amount of money as a down payment.  You may bring more cash to the table to make up the difference.  If you love the house and have the additional cash, you may want to purchase it in spite of a low appraisal.  If, however, the appraisal is truly accurate, give thought to the fact that you may have overbid on the house.
  3. Change the terms of the loan.  Check with your lender, you may be able to do a First Deed of Trust for the original loan amount and a 2nd for the difference in the sale price and the appraised value.  You may avoid private mortgage insurance by doing this, but you will have other additional upfront costs such as additional title insurance, closing costs, etc.
  4. Challenge the appraisal.  Appraising a home is not an exact science.  It is a somewhat subjective value.  No two houses are exactly the same, therefore there has to be a lot of subjectivity in any assessment.  You can certainly challenge the appraisal.  An appraisal is an attempt to place a value on a home based on many different methods of evaluation.  Insist on the appraiser re-visiting the property and doing a re-evaluation.

Remember:  The best test of market value is what a buyer is willing to pay for a house and what a seller is willing to accept.