Low home appraisals abound in 2015, causing great problems for home sellers and buyers alike. Mortgages themselves are intrinsically linked to an appraisal report, as your mortgage cannot be approved without an appraisal report on the home's value.
Appraisals are far from guaranteed to come in at your contract price, and loan options do change if your appraisal comes in short. Here's what you can do, as recently detailed by Zillow.
Loan Options With Low Appraisals
Mortgage lenders extend a loan on the lowest price between either your contract price or the home's appraised value. If the appraisal comes in lower than you've agreed to pay you have three options:
- Increase your down payment,
- Increase your monthly budget, OR
- Terminate your purchase contract.
This can happen in a number of scenarios, and is happening more frequently now with a high-activity, low-inventory market. If you are bidding $325,000 on a home listed at $300,000 because you know there are multiple bidders and are planning to put down 20%, it can become more complicated when the home appraisal comes back $300,000.
At the beginning of your process, the $325,000 contract minus your 20% down payment of $65,000 made your loan $260,000. With a low appraisal, this is no longer an option. Instead, you have the following two options.
1. Increase your down payment to avoid paying mortgage insurance
With the above scenario, the most you can now borrow, without paying mortgage insurance, is 80% of the $300,000 appraised value - $240,000. Your down payment now must now be $85,000 instead of the previous $60,000 in order to cover the difference between the $325,000 home purchase price and the $240,000 loan amount.
If the extra $25,000 is something you can afford (and you still wish to go through with the process), you will need to discuss with your lender to determine if you'll have enough reserves left after closing to qualify for the loan.
2. Keep the same down payment, but pay mortgage insurance
If adding $20,000 to your down payment isn't something you're interested in or able to do, you may be able to get your target loan of $260,000 as originally intended (this may require getting a different mortgage product.) The caveat is that the loan is now only 86.7% of the home's value, so you'll have to pay mortgage insurance to cover the remainder.
The difference in payment (assuming a 30-year fixed loan at a rate of 4%), you will pay $1,761 (plus mortgage insurance) sticking with an original downpayment without paying the extra $25,000 downpayment. If you were to pay the extra $25,000 downpayment, your monthly rate will be $1,538.
In other words, if you put up the extra $25,000 downpayment up front, you will save $223 per month when compared to not paying the extra downpayment up front.
3. Call in your mortgage contingency and terminate the deal
Your purchase contract should have a mortgage contingency within, one that contains specifics on the loan type you're applying for, terms and rate. If you're unable to get a loan meeting those terms, within the alloted timeframe, you should have the option to cancel the contract.
Can you dispute low appraisals?
When an appraisal comes in short, you can work with your lender and real estate agent to evaluate the appraisal, investigating the report to see if all relevant comparable sales were included to arrive at their conclusions. There are, of course, a wide variety of factors that go into an appraiser's process, including location, size, age, condition of the homes sold, and how recently the homes sold.
It will typically be the lender (after consulting with your real estate agent) that will advise a dispute. It will be your lender that writes up a case for the dispute to present to the bank's appraisal department.
Note that this process is often complicated and slow, so you'll want to ensure your contract allows time for a dispute, or that you request an extension of your mortgage contingency period.
If the appraised value is then revised to your contract price, you can continue with the original structure of your deal. If the lower appraised value is validated, you can then ask the seller for a price reduction. If they refuse this, the three options above are where your sale will stand.
Questions? Need help? We'd love to discuss your concerns. Please don't hesitate to send us an email or give us a call!
