Appraisal Too Low, Now What?

Will a lender provide a mortgage if the property being purchased is appraised under asking price?

2 Answers

The short answer is yes but more probably no. If the appraisal is too low, a disconnect may exist between the asking home price and its appreciably lower appraisal price. A motivated buyer may want the home bad enough to provide a larger down payment to satisfy the loan. But, many lenders may not want to issue a loan that is already tainted with negative equity at inception. The lender still perceives the loan as risky.

The long answer involves defining the amount of a home loan and its relation to the home or appraisal value. First, a few concepts must be identified and defined before discussing loan-to-value (LTV) ratios in mortgage financing.

A home can have a low or high comparable, appraisal value attached to it. The home seller can sell his/her home for a price that may be set below, at, or above an appraisal value. Ideally, the appraisal and home value should match or be fairly close to the other. In defining high versus low appraisals, let's discuss a couple of lending scenarios that may be acceptable and unacceptable.

Artificially High Appraisals A property appraisal can be artificially inflated for several reasons. For most lending scenarios, the loan originator determines the amount of the loan based on a fair market appraisal. In this example, the lender can fix a secondary mortgage at a maximum of 95% LTV.

Let's say a borrower needs this loan to consolidate debt. If the appraisal on the borrower's house comes in too low, she may not get the loan and the loan originator does not get a commission. But, a less than honest lender may artificially inflate the appraisal value of the home to get and close the loan. Ironically, the borrower may be laden with more debt, and the lender and appraiser are now liable for fraud. Many appraisers get away with this tactic since most appraisals are subjective.

Low Appraisals There are several reasons why a mortgage's LTV ratio may be high (the appraisal under price). Loan requirements are more stringent since the LTV is high. The lender can provide a hard money loan at the expense of the borrower. Or, the lender can provide a high interest loan (with points) coupled with a large down payment from the borrower. Either way, most lenders shy away from lending money if the appraisal is too low since the loan is already at high risk during origination.

The borrower has several solutions to this scenario from which to choose: the seller can lower the price, the borrower can challenge the appraisal with a private low cost home appraisal, or the borrower can walk away from the deal (through a mortgage contingency).

The borrower can persuade the seller to lower the price of the home to more closely match the appraisal value. Perhaps an objective meeting of the minds can provide a resolution that satisfies both parties.

The borrower can challenge the appraisal. Some appraisals are performed in error. The neighborhood comparables may need to be re-identified and redefined. Some homes in a neighborhood may not accurately represent the true market value of the neighborhood

The borrower may walk away from the deal if certain transaction conditions are not contractually met between the lender and seller. The borrower can exercise a mortgage contingency if specified in the mortgage contract. Perhaps the appraisal is a realistic reflection of hyper-inflated home values and the appraiser is doing you a favor. Walk away and thank the appraiser.

Yes, but not necessarily on the terms for which you may have originally been approved. Here's why:

One of the most important factors in the mortgage process is a number called the " loan-to-value ratio." In connection with a refinance, that number is the loan amount divided by the appraised value. For a purchase, that number is loan amount divided by the lesser of the purchase price or the appraised value. This number, commonly referred to as LTV in the industry is determinative of many things in connection with a mortgage.

Consider this example: John and Mary want to buy a house that costs $100,000. They have 660 credit scores and want to put 5% down. They get approved for 95% financing. However, the appraiser determines that the house is only worth $95,000. Thus, the lender determines that the loan-to-value is 100%. Because the lender requires 680 credit scores for 100% financing, John and Mary get turned down. Since the lender will only give them 95% of $95,000, they are faced with the choice of either coming up with more money or trying to get out of the contract. In this case, then, the appraised value determined how much of a down payment the borrower had to make.

Another thing the appraisal could influence is whether someone has to pay mortgage insurance. If John and Mary had $20,000 as a down-payment to buy a house for $100,000 and the appraisal came in short of $100,000, the loan-to-value would be more than 80%. In such a case, most lenders would require them to pay for private mortgage insurance. Yet another thing that would be affected by a short appraisal might be the interest rate. Many lenders offer a certain rate for loans with a LTV ratio of 70% and progressively higher rates for higher LTV's.

So, to answer your question, yes, it is possible to get a mortgage if the appraised value is less than the purchase price, but it is possible that the terms may change; and if they change, you may not be able to qualify for them. On the other hand, the lower appraised value may not affect the terms at all. Each situation is different and needs to be evaluated on its own merits.