An appraisal is a key step in the home-buying process, determining the fair market value of the property. But what happens when the appraisal comes in lower than the agreed-upon purchase price? This scenario can create challenges, but with the right strategy, you can navigate them smoothly.

How Does a Low Appraisal Affect Your Mortgage?

Lenders use the lower of the appraised value or the sales price to calculate your down payment and loan amount. If the appraisal comes in below the purchase price, there’s a gap that needs to be addressed. Here’s how it impacts you:

Example Scenario

• You agree to buy a home for $350,000
• The appraisal comes in at $325,000
• Your lender will base the loan on $325,000, leaving a $25,000 difference

Now, you have two options:

1. Negotiate with the Seller

This is where having a great real estate agent is crucial. They can help you:

• Ask the seller to lower the purchase price to match the appraised value
• Negotiate a compromise where both parties contribute toward the difference
• Request seller concessions to offset closing costs if the seller won’t lower the price

2. Pay the Difference in Cash

If negotiation doesn’t work, you’ll need to bring extra cash to closing to cover the gap. Keep in mind:

• This extra amount does not count toward your down payment
• You still need to meet your lender’s down payment requirements based on the appraised value, not the purchase price

How to Prepare for a Low Appraisal

Being prepared for a low appraisal can help buyers make informed decisions and avoid unexpected financial strain. Whether negotiating with the seller or covering the difference in cash, understanding the options ahead of time is key to a smooth home-buying process. For guidance on navigating appraisal gaps and other mortgage questions, contact Collette Horton at Liberty Star Mortgage.