Make Sure The Home Is Appraised
An appraisal is an independent opinion of a home’s market value, ordered by your lender to confirm the property supports the loan amount. It is different from a home inspection: the appraisal protects the lender and sets the maximum the loan can be based on, while the inspection protects you by describing the home’s condition.
Key Takeaways
- The lender bases the loan on the lower of the purchase price or the appraised value.
- If the appraisal comes in low, you can renegotiate the price, cover the gap with cash, challenge the appraisal with evidence, or walk away if your contract allows.
- FHA and VA appraisals also check that the property meets minimum property standards for safety and soundness.
- An appraisal contingency is the main protection if the value comes in under the price.
What is a home appraisal?
A licensed appraiser inspects the property inside and out, measures the home, notes its condition and features, and compares it with recently sold similar homes. The appraiser then issues a report with an opinion of value. Your lender orders it through an appraisal management process so the appraiser stays independent. You pay for the appraisal as part of your closing costs, but you do not choose the appraiser.
The lender lends against the property, so the home serves as collateral. If a buyer stops making payments, the lender may need to sell the home to recover its money, and the lender wants to know that sale would likely cover the balance. That is why the loan amount is based on value, not just on the price you agreed to pay.
What is the difference between an appraisal and an inspection?
| Appraisal | Home inspection | |
|---|---|---|
| Purpose | Estimate market value | Describe condition and defects |
| Who it serves | The lender (and informs you) | You, the buyer |
| Who orders it | Your lender | You |
| Focus | Comparable sales, size, features, condition and required repairs | Roof, structure, plumbing, electrical, HVAC and more (home inspection) |
| Outcome | Opinion of value | Report you use to negotiate or cancel |
A home can pass an inspection with flying colors and still appraise below the price in a fast-moving market, and a home with problems can appraise at full value if comparable sales support it. They answer different questions, so you need both.
How does the appraised value affect your loan?
If the appraisal is at or above the purchase price, the loan proceeds as planned. If it is below the price, the lender calculates your loan on the lower number. Your down payment percentage is measured against that lower value, so the gap generally has to come from you or from a renegotiated price.
What can you do if the appraisal comes in low?
1. Renegotiate the price
Ask the seller to reduce the price to the appraised value, or to meet in the middle. Your agent can use the appraisal’s comparable sales to support the request. A seller who knows the next buyer’s lender will face the same appraisal problem may be willing to adjust.
2. Bring more cash
You can cover the difference between the price and the value from your savings. This only makes sense if you have reserves after closing and if you are comfortable paying more than the appraised value. Talk to us first, because extra cash into the deal may change your loan structure.
3. Challenge the appraisal
If you believe the appraisal missed something, you can ask your lender about a reconsideration of value. Your agent can provide better comparable sales, point out errors in square footage or features, or document upgrades. A challenge does not always change the result, but a well-supported request can sometimes succeed. Your lender decides whether to submit it.
4. Walk away
If your contract has an appraisal contingency or loan contingency and you act within the stated deadlines, you may be able to cancel and recover your earnest money. Waived or expired contingencies could put your deposit at risk, which is why you should review your timeline in your offer.
Whatever you choose, consult your agent about your contract rights. For legal questions, speak with an attorney.
What property standards apply to FHA and VA loans?
All lenders want the home to be a sound asset, but government-backed loans add minimum standards that the appraiser reviews on top of the value opinion.
- FHA: The appraisal checks that the home meets FHA minimum property standards. Issues such as peeling paint on older homes, a failing roof, safety hazards or lack of working utilities may need to be corrected before closing. See FHA loan property requirements and our overview of FHA loans.
- VA: The appraiser applies VA minimum property requirements, which look at whether the home is safe, sound and sanitary. A termite inspection may be required on a VA purchase, depending on the area and what the appraiser finds. Learn more in VA appraisal and minimum property requirements and our guide to VA loans.
- Conventional: Standards are generally less program-specific, but the lender still requires that the property be habitable and in acceptable condition. See conventional loans.
If an appraiser lists required repairs, the seller can fix them, or the parties can negotiate who pays, and then the lender may require proof that the work is done. This can add days to your timeline, so tell your agent right away.
How can you help the appraisal go smoothly?
- Ask your agent to give the appraiser a list of the home’s upgrades, recent comparable sales and any permitted additions.
- Make sure the home is accessible, including the attic, garage and utility areas.
- Be ready to pay the appraisal fee when the lender requests it.
- Keep your closing date in mind; ask your loan officer how long the appraisal typically takes in your area.
After the appraisal is complete, your file goes back to underwriting. The next step is final approval and closing (close on your new home).
At Lendia, we help you plan for a low appraisal before it happens
At Lendia, we compare options from multiple lenders to fit your situation. We can walk you through how a lower value would change your cash to close, so you are ready if it happens. Contact us or get a rate quote now. Rates and terms depend on your situation; approval requires qualification.
Frequently Asked Questions
Who pays for the appraisal?
The buyer typically pays the appraisal fee as part of the loan costs. The lender orders the appraisal and the appraiser must be independent.
Can I use my own appraiser?
No. The lender selects the appraiser to keep the valuation independent.
What if the appraisal is higher than the price?
The loan is based on the lower of the price or value, so a higher appraisal does not increase your loan. It does give you some immediate equity.
Can I get a copy of the appraisal?
Yes. Your lender must provide a copy of the appraisal report. Ask us if you do not receive it.
Does a low appraisal mean the home is a bad purchase?
Not necessarily. It means the comparable sales did not support the price in the appraiser’s opinion. Think about whether the home is still worth it to you, and discuss it with your agent.
How long does an appraisal take?
It varies with appraiser availability and the market. Ask your loan officer for an estimate once the appraisal is ordered.
Talk to a Licensed Lendia California Loan Officer
At Lendia, we review your situation and show you the programs you qualify for.