My Home Didn’t Appraise For Its Purchase Price. What Are My Options?
Whether you're buying, selling or refinancing a home, the home appraisal is an important part of the process.
What Is A Home Appraisal?
By definition, appraising a home is the act of assigning monetary value to a property; determining its "fair market value".
For today's home buyers, a home appraisal helps to determine whether you're over-paying for a home relative to similar for-sale homes, or getting a "good price". For refinancing households -- save for those using a no-appraisal-needed streamlined refinance -- the appraisal helps to determine your mortgage eligibility.
Appraisals are performed by licensed home appraisers and there are several different methods by which an appraiser will assign value to a home. The Sales Comparison approach is the most common.
Via the Sales Comparison appraisal approach, a home appraiser will compare your home to similar homes in the immediate vicinity with similar physical attributes.
Examples of such traits includes number of bedrooms; number of bathrooms; age of home; quality of home finishes; and square footage. Location matters, too, such that similar homes in different school districts may have different appeal and may not be considered "comparable".
Appraisers will then look at recent sales data of such similar homes, and will assign your property's value based on available data, and with adjustments made for variances between homes. A home with a finished basement, for example, may be adjusted to a higher value; as might a home with recent renovations.
Homes sold in the most recent 90 days will receive the highest weight in the Sales Comparison approach. Homes sold over 6 months are often given no consideration whatsoever.
What Happens When A Home Appraises For Less Than Its Purchase Price?
Another home appraisal function is to help set your downpayment amount on a purchase.
Mortgage lenders use home appraisals as the "value" portion of the your mortgage's loan-to-value (LTV) calculation, where "value" is equal to the lower of your home's purchase price or its appraised value.
For example, if you purchase a $410,000 condo in Chicago, Illinois with an appraised value of $400,000, and you plan to make a 3.5 percent downpayment via the FHA, your required downpayment amount is fourteen thousand dollars.
Conversely, if your home appraises for more than the purchase price, the required downpayment amount is $14,350.
When your home appraises for less than its purchase price, there are three potential outcomes :
- Buyer and seller renegotiate a new, lower home sale price
- Buyer increases downpayment to meet new LTV and downpayment minimums
- Buyer chooses neither option, and cancels home purchase contract
The possibility of a "bad appraisal" is among the reasons why the majority of home purchase contracts are written with an appraisal contingency. In the event that the home fails to appraise for its purchase price, the contingency clause gives buyers an opportunity to re-evaluate.
Appraisal contingencies are also sometimes used to renegotiate or exit contracts after an appraiser identifies required repairs, such as chipped paint or cracked windows.
How Much Home Can You Afford?
For today's home buyers, a home's appraised value is unlikely to fall short of its sale price. This is because buyers and sellers are more savvy about the "going price of a home" in 2013, and because U.S. housing markets have exhibited steady growth since late-2011.
Home appraisers are likely to consider both factors when assigning a home's Fair Market Value.
If you plan to buy a home in 2013 or 2014, consider your household budget and your expected home downpayment. An appraisal can change your math, and so can rising home prices. See how much home you can afford -- it's free and there's no obligation whatsoever.