There are a lot of steps you need to make along the path to homeownership. One of those critical steps might be securing an appraisal on the property you want to buy. An appraisal is a key part of a lender’s decision to finance your mortgage. What happens if the appraisal value is too low compared to your offer? If a lender won’t provide a mortgage for the amount you require, what are your next steps? Here’s a quick review on appraisals, and dealing with an appraisal that comes up short.

Why do you need an appraisal?

If you’re reading this as you approach the path to homeownership, you might be wondering why you need an appraisal at all. Whether you’re just starting your house hunt, or you’re at the point where an appraisal is coming up, you often need to get one. An appraisal informs a lender of the property’s value, which they need to know before they grant you a mortgage. This is so they can be sure their loan matches the true value of the home. Traditional lenders don’t grant mortgages for amounts bigger than the property is worth. The lender will order the appraisal, but the borrower will almost always pay for it to be completed. 

Please note that an appraisal isn’t the same as a home inspection. An inspection searches the house thoroughly for safety issues or other problems that can take away from the home’s value. Appraisals are more concerned with property value in the real estate market than the specific conditions within the home itself. This means you shouldn’t rely on an appraisal to uncover the same issues that an inspection would.

Why might the value be too low?

If your appraisal value is too low, there are a couple explanations. First, we are in a changing market, where property values are on the decline after two years of steep increases. These changes began around the same time the Bank of Canada started raising interest rates back in March, and they’ve really taken effect since then. If you put an offer in on a property back in March, for example, and your appraisal is coming up this month, it’s possible the property value has decreased, and your offer from a few months ago is higher than the appraised value today. 

Aesthetics also have an impact on an appraiser’s estimation of the home’s value. If the home is messy, or the property isn’t maintained, an appraiser is much more likely to let this sway their judgment of the home’s value. Sometimes, the appraisers themselves may have incorrect data on market conditions in the area. This is especially true if they come from another area and don’t have experience dealing in your market. When this happens, it’s possible the appraiser doesn’t have access to other properties to use for comparison, and their appraisal consequently comes up shorter than you would expect.

Can you still buy the home?

It’s important to know that even if your appraisal value is too low, you may still be able to complete the purchase of the home. If the appraiser did not find any actual issues with the house, a lender is still fairly likely to agree to provide you a mortgage with the new, albeit lower, value. This means if you can cover the remaining costs between your mortgage and your actual offer, you can still buy the property. Of course, this means paying extra money that you didn’t necessarily bank on. However, if you have savings – or gifted funds from family – you may be able to complete the purchase. 

We should also note that you might be in a situation where you have to follow through with the purchase. If you made a firm offer, meaning you didn’t include any conditions of securing financing, you are legally obligated to buy the property. This means you have to find a way to cover those costs. No-condition offers were popular throughout the pandemic as buyers tried to make themselves as appealing as possible to sellers, but it can result in issues such as this.

Things to consider

Not all mortgages and purchases are the same. You might have some questions about your specific situation if your appraisal value is too low. What if you already have your pre-qualification? How about if you included a condition in your offer that requires you to obtain financing? Should you have a backup plan? 

Even if you’re pre-qualified, this does not guarantee you mortgage financing. If the appraisal value comes in low, the lender does not have to provide you with the mortgage they estimated you could receive based on your pre-qualification. Remember, pre-qualifications are not a commitment, just a guideline. If you included a condition in your offer along the lines of needing to secure financing based on an appraisal, you are in a safe position to walk away from the purchase without being obligated to see it through. We encourage buyers to include a condition of this sort to protect themselves. No matter how prepared you think you are, you can’t always be certain your appraisal won’t come in low. In this case, it’s good to have a backup plan. That might mean saving ahead of time to cover any costs if the appraisal comes up short, or having other properties in mind.

If your appraisal value is too low, don’t panic. While it can put you in a tricky situation as the buyer, in most cases, there are options for you. That could mean walking away from the purchase, or refinance or covering the costs yourself. If you’re unsure what your next steps are, that’s where a broker like myself comes in handy! We can review your situation together, and find the best path forward that benefits you. 

If you have any questions about your mortgage, get in touch with me!