Now what - The Home Did Not Appraise?
To know how to react to this you need to understand how the appraisal is done and what it means in the deal. The lender giving you the money for the mortgage wants to make sure their investment risk is minimized. To do this, they make a request to an Appraisal Management Company (AMC) for an appraiser to review the local market for similar homes that have recently sold in the area and compare those homes and sold prices to the accepted price of your deal. The appraiser takes into account the features, age, condition, and proximity to the home you have decided on, calculates a value and shares it with the lender. At this point there are two options:
- it appraised for the value offered,
- it did not appraise for the amount offered.
- Option 1 Home Appraises - means that the lender can feel secure that their investment will be protected by the current value and the amount of money you have placed down on the property. For instance, if your offer was for $100,000 with a 10/90 (10%down, 90% mortgage) loan that would mean you place $10,000 down and the lender is at risk for the loan amount of $90,000 at some rate and for some term. In other words, should you default on the loan and the lender should have to foreclose, there is $10,000 of equity in the home to protect the lender.
- Option 2 Homes Does Not Appraise - if the home does not appraise for the price accepted, then the lender will not lend on the offer amount, but still may lend on the appraised amount. For instance, if your accepted offer on the home was for $110,000 and the home appraised for $100,000, the lender may still be willing to lend at 90% of the appaised value, or $90,000, but the buyer will need to make up the difference in funds to match the accepted offer price of $110,000. This means that if the buyer wants to proceed with the contract they will need to bring $20,000 to the closing ($110,000 - $90,000) instead of the $10,000 in Option 1.
Appraisal Value vs Market Value
It is important in this discussion to understand the difference in the Appraised Value and the Market Value.
- Appraised Value - this value is generally based on local sales of comparable homes in a close proximity to the home being appraised. Just by that definition you can see the "appraised value" is historical in nature as it is looking back in time for what homes sold for in the market.
- Market Value - this value is what the buyer and seller have agreed on as to the value of the home when the offer was made and accepted. This is based on current market conditions. In a market where the home prices are rising fast and buyers are willing to offer amounts over the asking price, it may be difficult for appraisers to find sold comparables to support the market value. This means the buyer may have to bring more cash to the closing as described in Option 2 above.
Net/Net: if your home appraises for the amount accepted in the contract, congratulations! But if the homes does not appraise, you can still proceed with the contract if you have the additional funds required and if your lender is willing to take the risk. Your REALTOR, working with your lender can help guide you through this by explaining the options based on your case and setting the proper expectations!