What happens if the bank's appraisal comes in too low?
We explain everything from how the appraisal rebuttal process works to how to prevent a
low appraisal in the first place in the following video.
I'm Nick at Hauseit, visit our website www.hauseit.com to save money when buying or selling real
estate here in New York City, so let's get started.
If an appraisal comes in lower than the sale price it means that the buyers bank will only
issue a mortgage based on the appraised value as opposed to the contract price itself.
This results in a financing shortfall which is also known as an appraisal gap for the
buyer.
Here is an example of what happens if the appraised value comes in below the contract
price.
Let's say the contract price is 800k and the appraisal comes in lower at 750k, the bank's
loan to value ratio is 80%.
The original loan size is the contract price of 800k x 80% which is 640,000.
The new loan size is the appraised value of 750k x 80% which is 600k.
The financing shortfall is 640,000 - 600,000 which is $40,000 because banks don't typically
increase the loan-to-value ratio as a response to a low appraisal, it means that this financing
shortfall must be covered through the buyer putting down an extra $40,000 on the purchase.
If the buyer has an appraisal contingency or a minimum loan amount contingency, it means
that she or he is entitled to cancel the contract in response to a low appraisal.
However, most buyers and sellers will make an effort to keep the deal alive by utilizing
any number of low appraisal response strategies as we'll discuss momentarily.
What are the next steps if an appraisal comes in too low?
There are a number of strategies for responding to a low appraisal in New York City.
We explain each approach in detail below, option one.
Buyer increases his or her down payment.
The easiest response to a low appraisal in New York City is for the buyer to increase
her or his down payment to cover the appraisal gap.
If the appraised value is extremely close to the contract price, most buyers should
be amenable to putting slightly more down on the purchase.
Now, if the appraised value comes in way lower than the purchase price, most buyers will
be resistant to increasing the down payment.
They might also be concerned that they're simply overpaying.
If you are buying a co-op apartment, increasing the down payment will reduce your post closing
liquidity and this will increase your risk of not meeting the co-op boards financial
requirements so that's always something to keep in mind.
Option 2, seller lowers the contract price.
The easiest way for the seller to solve a low appraisal is to agree to reduce the contract
price to the appraised value.
Most sellers will be resistant to this idea however, especially if they feel that the
appraisal is inaccurate and out of touch with the market.
The most common approach is for the buyer and seller to renegotiate the contract price.
One common proposal is for the buyer and seller to meet in the middle and set the new contract
price as the midpoint between the appraised value and the original purchase price.
Option 3, buyer applies for a mortgage with a new bank.
If the buyer and seller cannot agree on a new contract price, the easiest step is for
the buyer to apply for a mortgage with another bank.
Applying with the new bank means that another appraisal will be ordered.
Oftentimes, buyers are resistant to applying with another bank since they will have to
pay for another appraisal which can run anywhere from 500 to a $1,000.
In addition, a buyer who has secured an attractive interest rate lock will be even less interested
in applying with a new bank presumably at a higher interest rate later down the line.
Furthermore, applying with the new bank can often delay the co-op board approval and general
deal closing time line by 2 to 3 weeks or perhaps longer.
Option 4, buyer submits an appraisal rebuttal also known as a reconsideration.
Submitting an appraisal reconsideration with the buyers lender is another way to respond
to a low appraisal.
Most appraisal challenges will only be seriously considered if there are factual errors in
the appraisal or if the appraiser did not include the most relevant comparable transactions.
How can I contest a low appraisal in New York City?
A buyer can't contest the low appraisal by submitting what's called an appraisal reconsideration
with her or his lender.
The appraisal appeal process typically takes around 2 weeks.
The first step in an appraisal appeal is for the buyer seller, listing agent and the buyer's
agent to thoroughly review the appraisal provided to you by the lender.
When reviewing the appraisal, the most important things to look out for are factual errors
and key comparable transaction commissions like if the identical downstairs sold last
week and it wasn't mentioned.
Most banks will only allow the buyer to contest the appraisal if there are factual errors
in the appraisal or key emissions and the comps as we've mentioned.
Some examples of factual errors include incorrect square footages, an inaccurate room and/or
bedroom counts for the comparable properties.
It typically takes around two weeks to hear back from the appraiser once the buyer has
submitted the items for the challenge to her or his mortgage banker.
When the appraisal challenge is complete, the appraisal firm will provide the buyer
with what's called an appraisal reconsideration response and this responds to each additional
comparable or factual error presented by the buyer.
If there is an increase in the appraised value, the bank will be able to lend against the
new appraisal value.
If there is no change in the appraisal value, the bank will not be able to increase the
size of the loan.
How can I prevent a low appraisal in the first place?
Well, you can protect against the low appraisal as a seller by negotiating appraisal protection
as part of your deal terms.
The goal would be to get your buyer to waive the appraisal contingency and this means that
the buyer cannot back out or renegotiate the contract price if the appraisal comes in low.
Keep in mind that a buyer who agrees to waive an appraisal contingency would still be able
to include some form of a mortgage contingency if they're financing but it would be narrower
in scope since the low appraisal would no longer trigger an optional cancellation of
the deal as would be the case with a traditional mortgage contingency.
You can also reduce the risk of a low appraisal as a seller by having your listing agent prepare
comps to share with the appraiser at the time of the appointment.
So there you have it, we hope you found this video helpful.
I'm Nick at Hauseit and check out our website www.hauseit.com to learn about ways to reduce
your closing costs when buying or selling real estate here in New York City.
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