A Guide to Low Home Appraisals

If you’re financing a home purchase, your lender will likely order a home appraisal to confirm the home is worth enough to serve as collateral for the loan. In some cases, that appraisal could come in higher or lower than anticipated.

A low appraisal occurs when a home’s appraised value is below the purchase price stated in the signed contract—often described as an appraisal coming in lower than the buyer’s offer. If this happens, your lender may not finance the full original amount. Knowing how to handle this scenario can help you confidently navigate the homebuying process.

Home Purchase Appraisal Timeline

Your lender relies on your home appraisal to confirm the home can serve as collateral and secure the loan. The appraisal must happen early in the loan approval process because your lender will not loan you the full amount you need if the appraisal comes in too low. Here's how the appraisal typically fits into the home buying timeline.

1. The buyer makes an offer on a home.
2. The seller accepts the offer, establishing the contracted purchase price.
3. The buyer applies for or finalizes their mortgage application.
4. The mortgage lender orders the appraisal.
5. The appraiser evaluates the property and comparable home sales in the area.
6. The lender applies the appraisal’s results during underwriting.
7. The buyer and seller address any appraisal gap before closing.

Most appraisals show the home is worth enough to support your loan. However, a lower-than-expected value could affect your ability to borrow, and you will need to find a solution to this issue before closing.

What Does It Mean to Have a Low Home Appraisal?

Your appraiser provides a professional opinion on your home's market value, which may differ from what the buyer or seller believes the home is worth. The appraiser determines what your home is worth by comparing its features to recently sold properties.

A low appraisal means that the home may be worth less than the agreed-upon purchase price. This affects your loan-to-value ratio, which can affect how much your lender is willing to finance.

Low Home Appraisal Example

Here is an example of what a low appraisal could look like.

• A buyer makes an offer to purchase a home for $300,000.
• Their lender lets them borrow 80% of the home's value, so the buyer plans to make a $60,000 down payment.
• The appraisal says the home is only worth $250,000. There is a $50,000 appraisal gap.
• The lender will allow them to borrow only 80% of the appraised value, or $200,000.
• The buyer will be $40,000 short of the amount they agreed to pay for the home, so they’ll have to find a solution, which could include putting an extra $40,000 down.

How Often Do Appraisals Come in Lower Than Purchase Price?

Home appraisals rarely come in lower than the purchase price. Historical data from Fannie Mae estimates appraisals come in too low about 8.5% of the time. Newer data from The National Association of Realtors shows appraisal issues affect contracts only around 5% of the time.

However, rates can vary by housing market and economic conditions.

What Causes Low Appraisals?

Appraisers determine a home's market value by looking at comparable properties that recently sold. An appraisal may be lower than expected based on market conditions, issues with the property, or valuation errors. Here are some of the common causes of low appraisals.

• Appraiser errors: In some cases, appraisers make mistakes like using outdated comparable properties, miscalculating square footage, overlooking recent renovations, or overlooking key features like a finished basement, garage, shed, or deck.
• Seller's market: In a seller's market, rapidly rising home prices can create appraisal challenges. The older comparables an appraiser uses haven't caught up to the current market, so they don't fully support the current higher contract prices.
• Bidding wars: Competitive bidding can push the offer price above market value, even when buyers are willing to pay more.
• Unique properties: Homes with uncommon layouts, luxury upgrades, rural locations, or limited comparable sales can be more difficult to value accurately.
• Deferred maintenance: Visible or significant maintenance issues, outdated systems, or needed repairs may reduce the appraised value.

What Happens If Your Home Appraisal Comes in Low?

Both buyers and sellers are affected by a low appraisal. When the appraisal comes in too low, it can affect financing and underwriting and put the transaction at risk because the lender bases financing eligibility on the appraised value, not the contract price.

How Low Appraisals Impact Your Home Loan

Lenders have a maximum loan-to-value ratio, so borrowers can't borrow more than a set percentage of their home’s appraised value.

If the home appraises for less than expected, this lower value results in a higher loan-to-value ratio. This may require buyers to pay for private mortgage insurance (required when borrowing more than 80% of the home's value) or to bring extra money to the table if the gap can’t be negotiated with the seller. Buyers can check with their mortgage banker to understand options.

Appraisals are often required for a refinance as well. Because there is no purchase price, a refinance appraisal doesn't create an appraisal gap, but it does affect whether the borrower is eligible to refinance and how much they can borrow, as lenders still set a maximum LTV for refinances.

How to Handle Low Home Appraisals

You have several different options when a low appraisal creates an appraisal gap.

• Pay the difference out of pocket: You could bring extra money to the table to bring your loan-to-value ratio back within your lender's allowable limits.
• Negotiate a lower sale price: You could negotiate with the seller to reduce the price to the appraised value.
• Review the appraisal for errors: You can review the appraisal for mistakes such as missing real estate comps.
• Challenge the appraisal: You can challenge the appraisal if you identify factual errors or omitted properties. This could result in a revised value.
• Request a second appraisal: You can sometimes ask for a second appraisal, but your lender may deny this request.
• Walk away from the deal: If you included an appraisal contingency in your offer, you can often walk away from the deal and get your earnest money back.

Low Home Appraisal FAQs

If you still need to know more, here are the answers to some frequently asked questions.

What If an FHA Loan Appraisal Is Low?

FHA loans also require an appraisal. When an FHA appraisal comes in low, financing will be based on the lower appraised amount. The FHA amendatory clause protects buyers and often allows them to get their deposit back in these situations. Buyers also have the option to renegotiate the purchase price or pay the difference.

What If a VA Loan Appraisal Is Low?

VA loans also require an appraisal. When a VA home loan appraisal comes in below the offering price, the VA loan guarantee is based on the lower appraised value.

The VA Tidewater Initiative is an early warning system that alerts you when an appraisal is likely to come in too low. The lender and real estate agent have two business days to submit additional market data to try to support a higher appraisal. There's also a formal Reconsideration of Value Process after the Notice of Valuation is issued. This allows you to challenge the appraisal using new data.

If none of these options result in a higher appraisal, the buyer can renegotiate the deal, pay the difference, or often cancel the contract under the VA's escape clause.

What If a USDA Loan Appraisal Is Low?

An appraisal is also required for USDA loans. Because these loans don't require a down payment, buyers can't finance more than the appraised value. When the appraisal comes in too low, buyers can renegotiate, pay the difference in cash, dispute the appraisal, or cancel the purchase.

What If My Refinance Appraisal Comes In Low?

If a refinance home appraisal comes in too low, there is no offer price to compare against or contract to renegotiate. However, a low appraisal means you have less home equity, which affects your loan-to-value ratio. This means you may not be approved for a refinance loan or may be able to access less cash on a cash-out refinance. You can review the appraisal for errors or discuss your options with lenders.

Final Thoughts: Overcoming Lower-Than-Expected Home Appraisals

A low appraisal doesn't necessarily mean that you can’t close on your home. However, you will need to explore all options for moving forward, such as bringing more cash to the table, appealing the appraisal, or renegotiating with the seller. A mortgage lender can help you understand your options.

If you're buying a home, reach out to Freedom Mortgage today to find a loan that's right for you and get prequalified so you can move forward with your home buying journey.