We get questions from Sellers and Buyers about the Process of Selling/Buying a home. During that first educational discussion – the matter of the Appraisal normally comes up. As the Lender, we are often asked, “If there’s a low Appraisal what happens next?” The answer to that question is not as straightforward as you might think.
When you negotiate your best, offer, and sign the contract – there are a couple of next steps folks hold their breath for. The first is a clean Home Inspection. Very few Home Inspections have ZERO recommendations, thinking logically, that makes sense – you are, after all paying someone to go through the home with extreme diligence to mark any imperfections. Most of the items on those reports are just “good to know” – and the rest can be negotiated.
The next hurdle is the Appraisal. Unlike the Home Inspector, the Appraiser is not looking at minor repairs to the home. They are going to note the square footage, the condition of the home (is it “Like New” – is the roof going to need to be redone in 0-5 years?), the location of the property and the recent closed homes that are nearby and comparable.
The Appraisers are INDEPENDENT. They are not employed by the Lender. The 2009 HVCC Laws (The Home Valuation Code of Conduct) require the following:
“HVCC requires lenders to select appraisers through a third-party appraisal management company and does not allow the lender to directly interact with the selected appraiser, at any point.”
“Additionally, HVCC requires that the Appraisers be assigned appraisals on a rotation basis. The lenders can not request a specific appraiser look at a specific property.”
So, what happens if the appraisal doesn’t come in at the value you expected. Well, there’s two different circumstances we’ve seen… We’ve had Buyers and Sellers call us because a home (as an example) had a contract price of $235,000 and the Appraisal came in at $236,000. Both parties thought the home should appraise for more.
In this case, it doesn’t matter. If it the home appraised for AT LEAST the contract price, and the appraiser didn’t note anything egregious with the property that needed to be fixed prior to closing – we’re good. That appraisal is not going to affect the Loan Amount the Borrower is qualified for, and it is not reported to the Tax Accessor.
“If there’s a low Appraisal what happens next?”
What if the contract price (again as an example) is $350,000 and the appraisal comes in at $340,000? Well, then it’s a problem. In that situation we are going to look at the loan type. Government Loans have an Amendatory Clause attached to them that says (basically) if the property doesn’t appraise then the Buyer is not obligated to go through with the purchase.
Conventional Loans do not have Amendatory language in the Contract – but if the appraisal comes in before due diligence, and it’s low, the Buyer is not obligated to go further.
CAN the Buyers pay more than the Appraised value? Absolutely, and we’ve seen many cases where the Buyer felt that the contract value was there – even if the closed sales in that area could not support the value that DAY. They can (and sometimes DO) pay the difference between the contract price and the appraised value.
As the Lender, however, we can only provide the maximum loan amount on the property based upon the Sales Contract or the Appraisal, whichever is LESS. If the home appraises for $340,000 with a contract price of $350,000 (as in our example), the maximum loan is based upon the lower $340,000 number.
Can You Dispute a Low Appraisal?
Yes, low appraisals can be disputed. Each Lender follows the Federal HVCC Laws, and there are steps in place to dispute an appraisal. For most of us, there’s a dispute form that can be sent to the parties to complete. Perhaps there are comparable sales available that the Real Estate Agents feel support a higher value, perhaps the measurements for the home are off… there are many reasons for a reconsideration of value.
In SOME cases, an Appraiser will change their value – but a vast majority of the time, they do not. The Comparable sale might be too far away, might not have the same condition that the “subject property” has, might have a screened in porch that has to be considered. There are so many factors as to why an Appraiser will feel confident in their valuation of the home.
If the original Appraiser refuses to make changes, there are VERY RARE situations where the Bank allows for a review appraisal… meaning they allow someone else (on the 3rd party management company list) do another appraisal. If that appraisal comes in at value, the Bank must fill out a ton of paperwork explaining why they are going to work with the higher value. Honestly, this doesn’t happen very often because of the risk to the Bank. Most mortgage loans are sold, and this could cause the loan to be “non-saleable.”
If the mortgage loan is a Veteran Home Loan, and the appraisal is coming in low – then the Tidewater Act is evoked. Any VA Loan that is coming in below contract price, triggers the Tidewater Act. Once evoked by the Appraiser (they normally call us) we have 2 days to provide them with comparable sales to review prior to issuing their value. After reviewing the comparable sale provided, the appraisal might still fall short. If that happens there’s a VA Form (of course) for a Reconsideration of Value.
What Happens If the Dispute of The Low Appraisal Doesn’t Work?
There are times when a dispute of the low appraisal doesn’t end of forcing the Appraiser to make a change to the value. In that situation – all parties have the option to renegotiate the contract. If that fails, then the home usually goes back on the market.
If the home goes back on the market, and the Sellers now have material information, from a Home Inspection that they were shown (for instance), or from an Appraisal that shows fewer square footage – as the Lender, it is OUR understanding that these pieces of information must be disclosed to the new parties interested in purchasing the home.
Our experience is that the contract is normally renegotiated, and the parties find a solution that benefits all.
If you have questions about low appraisals from a Lenders perspective, you can call Steve Thorne, 919 649 5058. NMLS 60596
Equity Resources, Inc. NMLS 1579, NC L-134393-102
201 Shannon Oaks Circle, Suite 204, Cary NC 27511