What happens when your lender’s appraisal comes in low? It’s something that happens from time to time and definitely shoots stress levels off the chart when it does. A short appraisal can occur when your lender takes a look at your purchase and thinks you’ve overpaid for your property relative to other comparable homes.
What exactly does this mean for a buyer?
The lender will only finance your purchase up to the appraised value and may not be willing to fund your purchase at the debt ratio you want. If you were planning on 20% down, they will deem that a portion of your down-payment is going towards the difference in sale price vs. their appraisal figure.
Consequently your percent down will drop and in this particular example you’ll no longer have a conventional mortgage and will now need mortgage insurance. This could make it more difficult to qualify, locks you into a 25 year amortization, and costs you money as well.
What’s even worse is the situation where someone originally put down 5% and then gets appraised low. In this case they’d be unable to get financing at all.
What can you do to protect yourself so you don’t get sued?
The best two things you can do are not overpaying and having a finance condition in your offer. I fully understand that both are difficult to do in a rising market like we’ve had off and on for most of the last 7 years.
Overpaying in this case doesn’t mean only purchasing at list. I’m referring to purchases that would be way outside the current sold to list ratio averages for comparable properties. If detached homes are selling for 110% of asking and you pay 30% over then you very well could get hit with a short appraisal.
Make sure the home is fairly priced relative to the competition and don’t pay way over just because you ‘must’ win during a bidding war. If things get too crazy walk away instead.
A mortgage commitment from a lender is conditional on a number of things including getting an appraisal done. Your financing condition only protects you if you insist on having the lender do the appraisal during the conditional period. If you do end up facing a short appraisal you can simply abandon the deal or renegotiate price, the choice is yours.
It’s crucial that you have a conversation with your mortgage broker and lender about this matter if you’re worried about being appraised low before your purchase closes.
What about firm offers?
Buying with a healthy buffer instead of borrowing to the max is especially important if you are offering firm with no conditions, something that many buyers have been faced with since the 20-teens here in Kitchener Waterloo.
If the appraisal is short on an offer that is firm you have still have some options. Going in with a lower down-payment, or taking additional funds from your savings or from family is one of them. You could also ask the lender to re-appraise the property although they might not agree.
You could take your chances with another lender too, hoping their people come up with a more favourable number. If you have a lengthy close you could wait for prices to rise and then secure financing with the property becomes more valuable.
The last option is nuclear, asking the seller for a price reduction. If you ultimately can’t pay, the headache of suing you and having to relist the property may not be worth it to the seller. There’s no doubt a consultation with a lawyer is 100% warranted here.
There’s a lot to think about here. Do your homework and ask the right questions when you’re looking at financing before committing yourself to a purchase.
