When you buy a home, there are certain hiccups you might encounter when closing on your mortgage. Let's say you're laid off before your mortgage loan is finalized. Your lender may not be willing to move forward with that loan if you can't show proof of a steady income.
Another problem that might prevent your mortgage from going through is if the home you're buying comes back with a low appraisal. It's common for homes to undergo an appraisal before mortgages are finalized, and during this process, an appraiser will assign a value to the property you're looking to purchase. If that number comes back low, your lender might pull your mortgage.
The reason? Mortgages are secured by the homes they're used to finance. But a lender isn't going to let you borrow $250,000 to purchase a home that only appraises for $220,000. In that case, if you were to fall behind on your mortgage payments, your lender wouldn't be able to get repaid in full by selling the home in question.
Now in recent years, home values have been elevated. And as such, low appraisals haven't been such a big problem. In fact, the National Association of Realtors says that as of October 2022, only 7% of home purchase contracts were delayed due to appraisal issues, and that was down from 10% a year prior.
But still, this doesn't mean you won't run into an issue with a low appraisal. So it's important to know that you'll generally have these options in that situation.
1. Ask for a second appraisal
An appraisal often represents one person's calculations of a home's value. If you feel that the appraisal your lender has gotten isn't accurate, you can often request another one. But that's something you might have to pay for yourself, or ask your seller to bear the cost of it. And there's also no guarantee that a second appraisal will yield a different result.
2. Make up the difference with a higher down payment
Your lender is not going to write you a mortgage that's higher than what the home you're buying appraises for. But in that case, you should have the option to borrow less so your loan can go through.
Of course, this only works if you have the money to make a larger down payment. But let's say the home you're buying appraises for $220,000, and you're able to put down $45,000. Your lender might agree to a $175,000 loan because if it had to, it could conceivably sell your home at a high-enough price to be repaid in full.
3. Renegotiate your home's purchase price
If an appraisal says that the home you're looking to buy is only worth a certain amount of money, not only might that compromise your mortgage, but you may not want to pay more than that amount. So another option is to go back to the seller and renegotiate the terms of your purchase. They might agree to lower their price.
If they don't, and you can't work things out, you may be able to walk away from the transaction without losing the earnest money deposit you put down when you made your offer. Many home purchase contracts have an appraisal contingency that allows you, as a buyer, to walk away if an appraisal comes back too low and the seller doesn't come down on price to address that issue.
All told, a low appraisal has the potential to cause a mortgage to fall through. But that doesn't mean you don't have options. That said, think carefully about buying a home at a higher price than what it appraises for. In a seller's market, this often becomes necessary, but it does mean running the risk of losing money should you decide to sell that home in the future.
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