A home appraisal is an estimate of a home’s overall market value. It is determined by a number of factors, including the sales information for similar properties, the location of the property, and the home’s condition. Whether the borrower would like to buy or refinance, lenders use this information to determine whether or not the amount requested by the borrower is appropriate. So what happens if your home appraisal is less than its purchase price? There are a few options.

Home Buying

When the home you are hoping to buy is appraised at a value less than its purchase price, your mortgage could be affected. In most cases the seller will agree to discount the purchase price to match what the home is valued at by the appraisal. However, if they do not, your loan-to-value (LTV) ratio will change because lenders use the lower of the appraisal value or purchase price for this calculation. This could mean you have to raise your down payment in order to keep the same mortgage terms. In addition, both the homebuyer and seller can appeal the appraisal and request a new estimate of the home.

Although home appraisal values falling below the purchase price does not regularly occur, it’s important for buyers to protect themselves in case it does happen. The best way to do this is by adding an appraisal contingency into the home purchase contract. This will allow you to walk away from buying the property if the appraisal is lower.

Home Refinancing

Similar to home buying, your refinanced rates will be affected if the appraisal value is less than the purchase price. The extent to which this affects your refinance completely depends on how much lower the appraisal value is. If your LTV shifts so much that you have to purchase private mortgage insurance (PMI), then you have a couple of options:

• Appeal the appraisal
• Request an estimate from another appraiser (but keep in mind you will be paying for this additional appraisal)
• Decrease your loan amount to <80% LTV
• Hold off on refinancing until you build enough equity

Although the latter is sometimes the best (and cheapest) option for refinancers, it’s important to remember that you will still have to cover the cost of the initial appraisal.

Overall, whether you are home buying or refinancing, it’s important to be prepared in case the appraisal value is lower than expected. For more information about home appraisals, or to learn more about home financing in general, contact one of our mortgage specialists today.