You’ve been approved for a mortgage, congratulations! Then the unthinkable happens: your appraisal condition cannot be satisfied because the value came in lower than expected. Will this jeopardize your entire purchase? Will your refinance plans be completely derailed? This article will outline the options you have in each scenario, and what to expect
How is the mortgage affected by a low appraisal?
Lenders use a loan to value (LTV) ratio to decide how much they will lend on a given property. The LTV must be in line with the total value of the property, so when the value comes in lower, it could affect the amount of the loan. For example, on an insured purchase, the LTV must not exceed 95% of the purchase price, that means on a $1M home you need at least a $50,000 down payment even if the mortgage is insured.
My appraisal came in lower than the purchase. What happens now?
Let’s say you purchase a home for $800,000 as a first time buyer with a 10% down payment of $80,000. The bank conditionally approves your mortgage, then orders the appraisal, which comes back at $775,000 meaning you are now $25,000 short of the closing price. What are your options?
The lender will likely decrease the amount you can borrow on your mortgage and you would need to do one of the following:
- Increase the amount of your down payment (in this case by another $25k)
- Negotiate the purchase price with the seller (to get closer to the $775k range)
- Request a second appraisal, or try to appeal the original appraisal (to get closer to the $800k needed)
What are my options in a refinance?
Scenario: You have owned your home for a few years and are aware that there is a lot of equity available that you would like to use for paying off $75k in debts, and $100k in home upgrades. Your realtor estimates your home is worth $1 million, and your current mortgage owing is $600k and has a variable rate. Your penalty and closing costs will be just shy of $5,000. Based on the lender LTV guidelines, and your income available, your lender allows you to borrow up to $800,000.
The application is conditionally approved and the home is appraised at $950,000 because the comparable used by your realtor had larger lots & square footage, upgrades and finished basements. Now your max loan amount is only $760k (80% of the new appraised value), what options can you discuss with your mortgage advisor?
- Reduce the loan amount if possible and restructure the deal (in this case by either reducing the amount of $ for your upgrades or excluding a debt from being paid out)
- Appeal the appraisal or go with another appraiser or lender who will re-appraise the property (however this may be a higher or lower value)
- Cancel the transaction and wait until there is more equity available in the property
Although the scenario of a low appraisal is rare, it can still happen, especially in a volatile housing market. It’s important to know your options and what to expect in the worst-case scenario so you can map out all options accordingly. In many cases, opting for another mortgage lender is a great option to mitigate the lower value.