Buying any property is an emotional rollercoaster especially if you have never purchased one before. Each step seems to take a toll on you and you are left wondering if you are making the right decision or not. One of the biggest concerns is if the appraisal is going to come in higher than the loan you are approved for. If this happens to you then congratulations! You have instant equity in the home!
The appraisal coming in higher than the price negotiated is such good news for you. What it means is that you did a great job at negotiating the purchase price for your new home. Unless there some obvious flaws in a property, normally appraisals come in right at or below the purchase price. Appraisers are under a microscope when performing their job and will always do their best at evaluating exactly what a property is worth. Some times you will find one who is inexperienced or out of the area or both. This may affect the appraised value in a positive or negative way, depending on if your are the buyer or seller.
What you should do if your appraisal is higher than your loan
Celebrate that you got a great deal but keep it to yourself. Your lender will definitely approve the mortgage but you still need to close on the deal. As soon as you have the keys then you can brag about it all you want.
Benefits to you
You will have instant equity as soon as the property closes escrow.
It will take you less time to have to wait to refinance and get rid of the Private Mortgage Insurance (PMI). PMI is the number one reason to refinance your mortgage. The seasoning period is 6 months and even though it seems crazy to refinance that early, as long as you have enough equity, you should do so to save yourself in the long run.
If you are looking to invest in multiple properties, you can refinance in 6 months and take advantage of tax-free money. Then you can use this for a down payment on another house.
What you should not do if your appraisal is higher than your loan
Do not start telling everyone what type of deal you are getting. There are still many hoops to jump through and you are not out of the woods yet. There is no sense to start telling people how lucky you are and end up not closing on the deal.
Concerns of a high appraisal
What people initially worry about is that the seller will cancel upon receiving this news. What is good news for you isn’t necessarily the case for the seller. Don’t be too concerned though because as long as your agent did their job, the contract you signed is what will lock in your purchase price.
What if the appraisal comes in lower than the loan?
This is definitely a frustrating situation to be in. As if negotiating a purchase price wasn’t hard enough, you now have to go back and renegotiate the deal. You can come in with extra cash or find another way to get the deal done.
Banks are asset lenders and will only lend on the appraised value. Once they have it, they compare both appraised and purchase to see what decision they have to make.
What you should do if the appraisal is lower than the loan
Don’t freak out. Make sure you have an appraisal contingency in your purchase contract before you sign your offer. This protects tour earnest money deposit Incase of this event. You will not be able to add it to the contract after you find out the home appraised for lower than the purchase price.
Just because the appraisal came in lower than the asking price does not mean you need to give up just yet.
A bank will not lend you more than the value of the subject property. In this instance you will end up with a smaller loan but it doesn’t mean you need to fork over all of the extra cash.
The seller does have the option to lower their asking price. As a seller, I base my sale price off of not just how much I want make but the time cost associated with selling as well. If I need to lower my price to close the deal I will do so. It makes no sense to lose 3 more months of rental income when I could get the deal done for a smaller amount of money. I will however attempt to negotiate with the buyer to come up with some extra cash to off set my losses as well.
The seller can also choose to carry a second mortgage on the property. This is called seller financing. The cool thing about this is that you can negotiate your terms of the second mortgage and create whatever type of loan you want or need. You can amortize the difference over a short period or long period of time. You can also negotiate the interest amount easier than a bank. This is a great strategy that can be very flexible when used correctly.
You can also order a second appraisal if your are doing a FHA loan. Either sell or buyer can order a second opinion. If you have a conventional loan you can have your agent request a local appraiser to be used. This ensures the person performing the appraisal knows and understands your local market. Doing so will limit some mistakes that may be made by someone who is out of your area.
If you really want to purchase a property, what are you willing to give up in his situation? Are you able to bring more money for the down payment, or are you already tapped out as far as reserves?
The last option is the one that happens the least. When my wife and I bought our first home in 2009, our agent made a mistake. We needed to come up with an extra $1500 for closing costs and the lender wouldn’t allow any gifts to cover the funds. Our agent graciously offered part of her commission to cover the difference and allowed the purchase of our home.
Most agents would never dream of losing out on their commissions. What she did was unheard of and will most likely never happen to me again. I am very thankful that she was able to help us and will never forget what she did.
What you should not do if the appraisal is lower than your loan
Just because you hit another roadblock does not mean you should walk away right away. Explore your options and work diligently with your agent. If you can’t afford the difference and have exhausted all of your options, then it may be time to move on.
I have been purchasing and selling homes for the last 7 years. Each time I do something different comes up. Each property will come with its own set of problems and setbacks. I have walked away from more properties than I have purchased. Some times I know before I make an offer and other times unsolvable problems arise in the middle.
Be diligent, expect problems, learn from your agent and go find a property you will love!
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.