Do you ever feel that Real Estate is one big Panic Button moment? If you do, you have lots of company. The whole process from preparing to list a home to making an offer to your move date, can feel like you never know what is coming at you next. One of those hyperventilating moments can come at you with the appraisal report.
It is now the end of February and inventory is still pretty low and sunny weather should begin, awakening the interest of many buyers and sellers alike. As a seller, you may find you have multiple offers, some over asking price. Conversely, as a buyer, you may find yourself offering full price or over asking. Doesn’t seem too bad, especially as the seller. But, here comes your panic button moment. The house appraises lower than the purchase price.
Appraisals are ordered by the lender in an effort to protect the buyer and the lending institution. Remember, the property is collateral for the large chunk of change you are borrowing and the bank wants to make sure they can get that money back should you default. If you are a cash buyer, you don’t have to consider an appraisal. It is your money. But, if you are using borrowed money for the purchase of property, an appraisal is in your future.
The bank is interested in the Loan-to-value ratio (LTV). If the property appraises for lower than the purchase price, it increases the LTV. This is risk for the bank. The borrower may no longer qualify or be able to afford the payments due to the higher LTV (The higher the LTV, the riskier the loan and the higher the APR=higher monthly payment). Hitting the Panic Button in 3, 2, 1...
If the appraisal comes in under value, you have 3 basic options when dealing with conventional financing.
Negotiate to lower the purchase price to bring the LTV down. This is usually the best and most common option.
Increase your down payment to lower the LTV or come up with the difference in cash.
Cancel the contract. The appraisal contingency in most residential purchase contracts allows for this option. If you waive the appraisal contingency, you are left with options 1 or 2.
If you are using an FHA/VA loan you are limited to negotiating down to the appraised value, coming up with the difference in cash or walking away. If you have a very large down payment to begin with, the LTV was already very low and the appraisal may not be an issue.
Therefore, as long as you haven’t waived your appraisal contingency, you have the option to walk away from the contract if a lower purchase price can’t be negotiated. It may be a sad end to what you hoped for, but at least there is an option. Panic Button averted (sort of).
Thanks for reading.