What Happens If the Appraisal Is Lower Than the Contract Price?

An appraisal is an independent opinion of value used by a lender to evaluate the property for a financed purchase. If the appraised value comes in below the contract price, the buyer and seller may need to revisit the numbers.

Why a lender cares about the appraisal

Mortgage lenders generally want the collateral to support the loan. The appraisal is one part of the lender's underwriting process. The lender's specific requirements depend on the loan program and transaction.

What can happen after a low appraisal?

There is no single automatic outcome. Depending on the contract, financing and parties' goals, possible paths can include a price reduction, a change in the loan structure, the buyer bringing additional cash, challenging the appraisal when permitted, or terminating if a contractual provision allows it.

Example

Suppose the contract price is $500,000 but the appraisal is $480,000. The lender may base the loan calculation on the lower supported value. The parties then have to determine whether and how to bridge the $20,000 difference.

Can the appraisal be challenged?

In some circumstances, the lender may allow a reconsideration of value or other review process. The buyer should provide relevant comparable sales or factual information through the lender's process rather than trying to negotiate directly with the appraiser.

What sellers should know

A low appraisal does not automatically mean the home is “worthless” or that the original contract price was unreasonable. Appraisals and market negotiations answer different questions. However, a financed buyer may have difficulty completing the transaction at the original price without another solution.

What buyers should do

• Ask the lender what the appraisal means for your loan.
• Review the contract for appraisal-related provisions.
• Discuss options with your broker.
• Ask the lender about any reconsideration process.
• Do not make a large cash decision without understanding the loan implications.

Bottom line

The best response to a low appraisal is usually calm, factual and contract-focused. The lender, broker and closing attorney each have different roles in determining what options are available.