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If you’ve got an offer accepted on a home, you may think you’re good to go. But find out why an appraisal issue could send you back to square one.
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Buying a home involves a lot of steps. You’ll need to get preapproved for a mortgage, first and foremost. You’ll also need to find a property and get an accepted offer. Then, you have to move forward with finalizing your loan approval.
Once you’ve completed the start of this process and have an offer accepted by a seller, you may feel like you are home free and going to be moving in any day. Unfortunately, that’s not necessarily the case.
Finance expert Dave Ramsey warns that one issue could arise that could set you back to square one. Here’s what the problem is and why it’s such a big issue.
Could this problem derail your home purchase?
The issue Dave Ramsey warns about has to do with your home appraisal. “If the appraiser determines that the home value is drastically different than the selling price, it could set you back to square one on the mortgage process,” Ramsey warned.
An appraisal is typically required by a mortgage lender after you’ve gone through the preliminary approval process and found a home you want to buy. The appraiser will come to the house, assess the condition, find out about key features (like square footage and number of bedrooms), and then determine how much the home’s fair market value is.
Lenders will mandate you get this appraisal done to make sure that you are not borrowing too much relative to the home’s fair market value. Typically, you must put some amount of money down on a home — around 3% is the minimum, but ideally 10% or 20% of the home’s value. The problem is, if the house is actually worth less than what you’re paying, the proposed down payment you’re making might be an even lower percentage of its value than it appears.
Say, for example, you are making a 10% down payment on a home you are paying $400,000 for. You’d put $40,000 down and borrow $360,000. But what if the appraisal showed the house was only worth $350,000? You’d be borrowing more than the house was actually worth — and the house is supposed to be collateral guaranteeing the loan. The mortgage lender wants to be sure they can sell it for more than you owe if you stop paying on the loan.
If it turns out a house isn’t worth enough, a lender isn’t going to give you a loan under the current terms.
How to cope with a low appraisal
If your chosen house appraises for less than you expect, you have a few options. You may be able to appeal the appraisal, which involves asking the appraiser to take another look (and perhaps providing some data on other comparable sales that may make a higher price seem justified).
You could also switch lenders and hope the appraiser they send out gives your chosen home a higher valuation. There’s no guarantee this will work, though — and you’d be out the money for another appraisal, perhaps only to find the home still appraised for too little.
The third option is to put more money down. In the above example, you might have to pay an extra $50,000 on top of your $40,000 down payment out of your own pocket if you still bought the home for $400,000. If you did that, you’d only need to borrow $310,000, so your home loan would be 86% of your house’s value — an allowable loan-to-value ratio for most lenders.
You could also try to renegotiate with the seller to accept a lower price — if they were willing.
If one of those solutions doesn’t work, though, you’d be back to square one in your home search and would have to find a different place to buy.
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