You found the home you want to buy, but find out that the appraised value is less than you bid on the home. Are you out of luck or can you still buy the home?
The answer is tricky, but we help you understand how the process works below.
The Appraised Value is King
The lender will go off the appraised value. That is how they decide how much collateral they have in the home. If there isn’t enough collateral, they won’t give you the loan amount that you want. What they will do, is base your LTV (loan-to-value) on the appraised value.
Here’s how that works:
Let’s say you bid $250,000 on a home and the seller accepted it. Now you hear that the appraiser says the home is worth $225,000. The seller won’t budge on the price. You were getting conventional financing, so the lender can lend you up to 95% of the appraised value or $213,750. You have to come up with the remainder of the money in cash, which means $36,250.
If the home had appraised for $250,000, the lender would have been able to give you $237,500 as a loan. That would leave you with a cash requirement of just $12,500.
Paying More Than the Appraised Value
Now, here’s the bigger issue. Should you pay more than the appraised value? While it might seem like a no-brainer if you have the cash to do so, you should think of the downsides.
First, you will invest more than the home is worth. It could take you a long time to make your money back. If this is a short-term purchase, you should find another home to buy. You probably won’t make your money back in time.
Second, you are banking on the fact that the home will appreciate. What if it doesn’t? There’s no rhyme or reason as to why home values rise and fall. What if another housing crisis occurred? Then you would really be upside down.
Options for Dealing With a Low Appraisal
What should you do if you end with a low appraised value? Consider the options below:
- Talk to the seller about a lower price. If the seller really wants to sell his home, he will likely be willing to lower the price. Once there is an appraised value established on the home, you can discuss a lower price that matches the appraised value with the seller.
- Walk away from the sale. If you have an appraisal contingency on your purchase contract, you should be able to back out of the purchase without any penalty. As long as you back out before the appraisal contingency expires, you should get your earnest money back and be able to shop for another home.
- Pay the difference in cash. This is the option we spoke about above. Make sure you give it careful consideration before you do this. If it’s only a small difference, it might be acceptable. If the difference is too large, though, it may not make sense to do so.
The bottom line is that you can purchase a home for more than the appraised value. The larger issue is whether it makes sense to do so or not. Make sure you weigh the pros and cons of the situation carefully before making a decision.Click to See the Latest Mortgage Rates»