Steps To Take When a Home Sale Is On the Line
Congratulations! You’ve decided to purchase a home, your offer has been accepted, and the conditions have been satisfied. The only thing standing in your way is a low appraisal value. You might be wondering – what happens now?
To help you navigate a situation you probably never thought you’d be in, this article will explain what a low appraisal means for you and your mortgage, and what steps you may need to take.
What Is a Home Appraisal, and Who is Behind It?
If you’re in the market to buy a home, a “home appraisal” is a term you will be hearing a lot of. This is the process by which a thorough inspection of a property is conducted to assess its true worth (which isn’t always the same as the listing price). The appraiser will then compile all of their findings into a report and generate the home’s appraised value.
If you are financing your purchase with a loan, your lender will typically be the one to order the appraisal. This a formality for the lender to ensure that they aren’t lending more money than the property is worth.
What Factors Are Considered?
This is a great question to consider, in order to prep you for what to expect when getting your appraisal. Appraisers look for a variety of details, including the following:
- The property’s dimensions and the year the home was built
- Neighbourhood characteristics and zoning classification
- The home’s foundation and construction type – is there a basement or attic, the type of driveway, car storage, materials of the interior walls and floors, etc.
- What public utilities or other off-site improvements are there, and are they typical for the neighbourhood? Does the house have amenities such as a fireplace or patio, features such as energy efficient appliances? What types of plumbing and lighting fixtures does it have?
- The general condition of the property and any needed repairs
How it Affects Your Mortgage
As a buyer, you have the opportunity to re-evaluate on the investment. Should the home fail to appraise for its contracted purchase price, if you included a financing clause in your offer, this will allow you to re-evaluate and, potentially, walk away. Otherwise, as a buyer, you may have to increase the down payment to meet new LTV and down payment minimums. Be sure to discuss this with a skilled mortgage broker team before you make any decisions.
If the appraisal comes in short, the seller can:
- Agree to still sell for the agreed price
- Agree to lower the price to match the appraised value
- Cancel the agreement to purchase
Borrowers that are Refinancing
In a refinance, you can borrow a maximum of 80% of the appraised value. However, if the appraisal report comes in low, or if the property is deemed incomplete, hazardous, or unique in any way, this could be bad news for the borrower who is refinancing. A bank may decline the loan and deny financing to the potential borrower or they could reduce the loan amount you can get.
Reasons an Appraisal May Be Low
There are many reasons why an appraisal can come out lower than expected. One reason may be that the property isn’t a strong contender based on any of the inspection factors listed in the section above, especially in comparison to other houses in the market area. Another reason could be purely based on the housing market. If the market moves faster than normal, comparative sales or comps often don’t keep pace with present prices. This is why they say “usually, the market moves before the appraisers do.”
Always work with someone trusted, so that you can get the most honest appraisal possible, whether it turns out to be high or low. Trust your Mortgage Broker to choose an appraiser they trust who will make the most effort to provide an accurate appraisal.
What to Do If an Appraisal Value is Low
Find Another Lender
You might have to start from scratch and find another lender, but note that many lenders are going with automated appraisals (AVMs) to save time and money. Consult with your mortgage broker about whether finding a new lender is advisable and will benefit you in this situation.
Renegotiate the Sale Price
One of the ideal solutions to this type of scenario is for the asking price to simply lower if it was overpriced or the value was inflated. This keeps the buyer happy and the lender satisfied. Also, there’s no guarantee that the seller won’t receive a low appraisal from other buyers’ lenders if the first buyer walks away.
Increase Your Down Payment/Make Up the Difference
As a buyer, it’s tough to remain calm when a pending sale seems to be falling apart, but if you really want follow through with the sale, and you have the financial means, you can make up the difference between the appraisal value and the sale price in cash.
Back Out of the Sale If Possible
While this is the least desirable outcome for all parties, the sale might have to be called off, and the buyer has the right to walk away. Sometimes, a property just isn’t worth it.
How the COVID-19 Pandemic Has Affected Appraisals
Due to the COVID-19 pandemic, appraisers will not enter a home to ensure the health and safety of the home owner and appraiser.
Therefore, appraisers are now relying on home owners to provide pictures of:
- All rooms (bedrooms, bathrooms, living room, dining room, basement rooms etc.)
- Mechanical areas (furnace etc.)
- Open faced electrical panel
All photos should be taken in a “landscape” fashion, as it is more compatible with the software they use. Also include any updates you’ve done to the property in the past 5 years or since you bought the home (siding, furnace, roof, bathroom/kitchen renovations, etc.)
Appraisers are often processing 7 to 10 reports a day, so if you take too long to load up your pictures when requested, your report drops down 10 files daily, which will result in a delay.
Have a great photo shoot, and remember, take the pictures as if they will be use to sell your home to a new buyer!
You don’t have to be left in the dark if a low-appraisal scenario occurs. Don’t be afraid to seek assistance through licensed professionals who will help you make the best decision possible.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.