Low home appraisals are responsible for 23% of real estate contract delays. And they are the No. 1 reason contracts are terminated, according to the National Association of REALTORS®. Despite it being a fairly common occurrence, a low home appraisal often catches homebuyers by surprise.
Why was your appraisal low?
Knowing why an appraiser valued the property below the purchase price will help you decide whether to dispute the appraisal, bring more cash to the table or walk away from the transaction. Here are some factors that can contribute to a low home appraisal:
- The seller priced the home above market value
- The local market recently increased, and the appraisal is based on old comparable properties
- The local market recently declined
- The local market had many recent foreclosures or short sales
- The appraisal is based on incorrect square footage, wrong bed or bathroom counts, missed home improvements or other errors
- The house is outdated or needs significant repairs
- The appraiser is inexperienced or doesn’t know the local market
- The appraiser did not consider pending sales
- The appraiser made an error in the valuation
If you’re still interested in the home, you have options
Once you understand why the home appraised low, you can determine your course of action: dispute the appraisal with your lender, pay the difference out-of-pocket or cancel the sale. If the home value remains low after the dispute, or if you forgo the dispute and want to proceed with the transaction, you’ll need to bring cash to the closing table.
But first, consider carefully whether you want to purchase a home priced above market value. This can impact you negatively if you need to sell the house before the value increases.
Here are some options to make up the difference between the home value and the purchase price.
1. Take out a loan
If you don’t have the additional money readily available, one way to get it is to take out a loan. Depending on how much you need to come up with, a personal loan may make up the difference. Personal loan amounts generally range from $1,000 to $50,000 with loan terms up to five years.
Pros
- You'll be able to access the funds quickly.
- The loan won’t be tied to the home or other collateral
- You can stretch out the loan payment for up to five years
Cons
- You'll have an additional loan and monthly payment
- The interest rate you’ll be paying will likely be higher than home loan products
- Applying for two loans at the same time can hurt your chances of being approved for one or both
2. Borrow from friends or family
If you have a friend or relative that is able and willing to lend you the funds, that might be another way to make up the difference.
Pros
- You may be able to borrow without paying interest
- You won’t have the potential delays of going through a lender
- You may have more flexibility in the repayment terms
Cons
- Borrowing money from friends and family can often complicate the relationship
- If the terms of the loan are not clearly laid out, there’s potential for conflict down the road
- The loan won’t be on record
3. Sell something valuable
You may be able to make up the difference by selling something you own, such as a vehicle, artwork or something else of value.
Pros
- You won’t have an additional loan payment
- You won’t have to go through an approval process
- You won't have to pay interest
Cons
- It could take a long time to sell the item
- You may regret selling your belongings
- To sell it quickly, you may end up selling the item for less than it’s worth
4. Negotiate with the seller
Unless the seller has additional buyers lining up — particularly cash buyers who won’t have to order an appraisal — they’ll likely be as disappointed as you are that the home didn’t appraise high enough. As a result, they may be willing to negotiate the contract price to help the transaction go through.
Pros
- You won’t have to come up with the entire difference between the appraised value and home price
- It will help move the transaction along faster
- It will improve your loan-to-value ratio
Cons
- You’ll still need to come up with some funds
- The seller may not be willing to negotiate
- You may still be purchasing a home above market value
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