Appraisals create a lot of angst in buyers, but a low one can potentially save you the nasty hangover from overpaying for a property. Hopefully you’re reading this before you’ve put an offer on a house, and your offer includes an appraisal contingency for getting financing approval.
If the appraisal comes back lower than you wanted, this likely means the numbers on paper don’t line up with the dream home in your head. Lenders place a lot of importance on loan-to-value (LTV). Lenders are most often willing to lend up to 80% of the value of a property, leaving the remaining 20% as a typical down payment (note, there are plenty of exceptions to this, such as FHA and VA loan programs). If the appraisal comes back higher than you anticipated, you may be getting a deal from a motivated seller!
Appraisals are intended to provide an unbiased third-party analysis of the lovely home you want to buy, also known to lenders as collateral for the money you’d like to borrow. This information is used by lenders to make a business decision on that particular property, within the context of current market conditions and recent sales of comparable properties.
If your appraisal comes back lower than you expected, there are options available. You could increase the down payment you’re making, you could obtain a second mortgage to account for the difference, or you could work out a loan that is more flexible in terms of LTV. If you’re going into the loan with less than 20% down payment, many loans will require PMI.