What Happens If a Mortgage Appraisal Is Low?

Low mortgage appraisals can eliminate purchases and refinances.

Low mortgage appraisals can eliminate purchases and refinances.

Mortgage appraisals can significantly affect you whether you are purchasing or refinancing a home. When buying a home, the mortgage appraisal indicates whether you are paying a fair price, getting a "deal," or possibly paying too much. Successfully refinancing a home, particularly if you need cash out, depends on the fair market value (FMV) as determined by the mortgage appraisal. If your appraisal is low, you will face some important decisions.

Low Mortgage Appraisals for Purchases

When you're buying a home, you want the appraisal value to match the price you've agreed upon or be a bit higher. Should the mortgage appraisal come in with a lower FMV than you've agreed to pay, you'll have to ask your lender to increase your mortgage amount, which will be challenging. You could try to renegotiate the selling price downward, which the sellers will not want to do -- however they may be convinced lower the price if they believe the appraisal was accurate. You could also choose to pay the extra cash, if you have it, to complete the purchase.

Loan-to-Value and Appraisals

Loan-to-value (LTV) and appraisals are interrelated. Loan-to-value is the percentage of your mortgage to your home's fair market value. For example, if your home is valued at $200,000 and your mortgage balance is $160,000, you have an 80 percent LTV. supposed you agree to buy a home for $225,000 and are approved for an 80 percent mortgage -- $180,000 -- but the appraisal indicates the home is only worth $200,000. Your lender may reduce its approval to $160,000. If you can't negotiate the price down to $200,000, you'll have to bring another $25,000 cash to the closing.

Appraisals and Refinances

Should an appraisal indicate your home is worth less than you believed, you may be unable to refinance your property. For example, you believe your home has an FMV of $220,000 and your current mortgage balance is $150,000 -- an LTV of 68 percent. This should prove no problem to a refinance. However, the mortgage appraisal indicates your home is only worth $185,000 now. Your current $150,000 balance increases the LTV to 81 percent. Your mortgage lender may not want to approve a mortgage over 80 percent. You may need to put in $2,000 cash to make the refinance work or cancel your application.

Appraisals and the Real Estate Market

Appraisers use three to six recently sold, similar homes in your neighborhood to establish your home's current FMV. In a "hot" real estate market, with consistent and rapidly rising home values, you usually have few appraisal issues with purchases or refinances, since your home's value rises, too. However, in "down" markets, your home, once worth one value, might now have a much lower FMV. It's not unusual for homes worth $250,000 in "hot" markets to be valued at many thousands less in "down" markets. If there are many foreclosed homes for sale in your neighborhood, your home's value could decline $50,000 or more.

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