What should you do if the home appraisal value is lower than the offer price?

If you’ve started the home purchase process, one of the many steps is an appraisal of the property’s value. When the home appraisal value is lower than the offer price, that can throw a wrench in your deal.

Since mortgage lenders won’t lend more than the home's appraised value, you’ll need to get creative to close on the home sale. Although making a larger down payment is one option, there are other ways to finalize the deal after the appraisal comes in at a price lower than the offer price.consumer-financial-protection-bureau-september-2024

What does a low appraisal mean?

An appraisal offers a professional estimate of how much a property is worth. The estimate is based on a home’s characteristics and how it compares to similar properties in the neighborhood.consumer-financial-protection-bureau-september-2020 consumer-financial-protection-bureau-september-2020  When you find that the appraisal came in low, it means the home’s appraised value is less than the agreed-upon sales price.

Is it common for appraisals to be lower than the offer?

It’s uncommon, but not unheard of, for an appraisal to come in low.

In 2024, 8.6% of home transactions saw the appraisal come in low, according to data from CoreLogic. Appraisal gaps were more likely among starter homes, smaller properties that tend to attract first-time homebuyers.federal-housing-finance-agency-january-2024federal-housing-finance-agency-january-2024federal-housing-finance-agency-january-2024federal-housing-finance-agency-january-2024

What happens if the appraisal is lower than the offer?

A low appraisal complicates the home purchase process. Mortgage lenders won’t lend potential buyers more than the home is worth, which means something else will have to give for the deal to close.

If an appraisal comes back low, below are some actions you can take.

Ask for a second look

An appraisal represents the opinion of a home appraiser. Paying for a second opinion could result in a higher appraisal value, but there’s no guarantee.

Start the process by asking your real estate agent to take a look at the appraisal report. If you or your real estate agent spot any mistakes, like incorrect square footage or a lower sales price for a neighborhood home, the appraisal might not be accurate. Your agent can submit proof of the mistakes to the lender and ask for a reevaluation of the home’s value.

If the original appraisal value is adjusted, your home sale can get back on track.

Make a larger down payment

If the seller is unwilling to adjust the sale price, buyers may have the option to make a larger down payment. Making a large enough down payment to close the appraisal gap—the amount between the sale and appraisal prices—can satisfy both the seller and the lender.

Of course, tapping into your cash stores represents a risk. But if you have ample savings on hand to cover a larger down payment, this option can make for a smoother process.

Try to renegotiate the purchase price

For buyers with an appraisal contingency, walking away from the deal without any financial penalty is an option. In a buyer’s market, you’re typically in a favorable position to renegotiate the sales price with the seller. Depending on the seller, you might come to a new sales price that reflects the appraisal value.

In a seller’s market, you might have a difficult time renegotiating the contract price. That’s especially true if other buyers are willing to make a cash offer and forgo the appraisal process.

Walk away from the deal

If you’ve worked through all of your options and haven’t found a suitable solution, it might be time to walk away. If you have an appraisal contingency, you can walk away without the risk of losing your earnest money deposit.

For buyers without an appraisal contingency, walking away typically means losing your earnest money deposit and potentially facing legal action. Although this might be a painful choice, walking away means you’ll avoid buying a home for more than it's worth.

Reasons for a low appraisal

A low appraisal can lead to hassles for both the buyer and seller. Below are some reasons an appraisal may come in low:

• Inflated prices: With low inventory and high demand, sellers choosing a high list price can still receive offers in some markets.
• Neighborhood: The appraised value might be lower if the property is relatively unique for the area or if the neighborhood is seeing an increase in foreclosures.
• Poor maintenance: If a property hasn’t been maintained by the current owner, that might lead to a lower appraised value.

How sellers can avoid a low appraisal

A low appraisal is often a disappointment for both sides of the transaction. When selling a home, taking small steps could help you avoid this closing headache. These actions include:

• Price your home accurately: Although it’s tempting to list your home with an above-market value, working with a real estate agent to price your home accurately can come in handy during the home appraisal process later.
• Clean up the space: A home that’s free of clutter and grime tends to make a better impression on the appraiser.
• Make minor home improvements: Installing a new garage door or upgrading your home’s floors are somewhat minor projects that might help you avoid a low appraisal.

In summary

While getting to the closing table after a low appraisal can be bumpy, it’s still possible. If you’re still wanting to close on a house after a low appraisal, explore all of your options before moving forward. Depending on your situation, increasing your down payment or renegotiating the sale price might be the best course of action.