So, you’re buying a house. You managed to survive the frustrating and nerve-wracking process of finding the right house and making an offer that was accepted. Now you can breathe a sigh of relief, right?
If you’re applying for a mortgage to finance your purchase, the next bridge you have to cross is the appraisal. Lenders appraise homes to ensure that they’re worth the amount they’re being purchased for. So in the event you default on your loan, they’ll be able to sell the home to recoup what’s owed to them. Therefore, the appraisal amount has a major impact on the amount of the loan you’ll qualify for. If the appraised amount is less than what you agreed to purchase it for, the financing will be based on the appraised value, not the purchase price.
What you CAN’T do
If you get the dreaded phone call from your loan representative telling you that the home you’re purchasing did not appraise for the agreed upon purchase price, your first instinct may be to appeal the appraiser’s valuation, however this may be fruitless. That’s because the odds of successfully appealing an appraisal are almost never in your favor. Your reasons for wanting to appeal the appraisal may be valid, however once the Collateral Underwriter assigns an acceptable risk score to it, it is generally a “case closed” situation.
What you CAN do
While a too-low appraisal obviously isn’t good news, all hope is not lost. You and your real estate agent will most likely want to approach the seller about lowering the purchase price. If the seller agrees, the issue will be resolved once the contract of sale is revised and you can move forward with the proceedings. If the seller does not agree to this, you may want to review the contract to see if you can legally back out of the deal without incurring financial hardship.
Your third option – if your finances allow – is to contribute more down payment money to make up for the amount of the reduced mortgage. And finally, your last option is to look into whether you qualify for a loan with Private Mortgage Insurance (PMI). This would allow you to make a down payment of between 3%-19.99% of the purchase price, instead of the typical 20% required. You would then be required to pay a monthly premium for the PMI until you accumulate enough equity in the home that your lender no longer considers you high risk.
It is important to keep in mind that a home that doesn’t appraise for its purchase price may in fact be worth that amount. Many factors contribute to the algorithm that decides a home’s appraised value, one of which is the selling price of homes in the surrounding area. It’s possible that a comparable home nearby wasn’t kept as well as this home and therefore sold for a much lower amount. Regardless of the reason for the low appraisal amount, the key is to keep an open mind and weigh all of the options available to you.
If for some reason your home or the home you are intending to purchase is not appraised at a high value, then contact us at Cliffco Mortgage Bankers to see what your options are.