What Happens If a Home Appraises Below the Purchase Price?

Answer

When a home’s appraised value comes in below the agreed-upon purchase price, it is commonly referred to as a low appraisal. Because lenders base the loan amount on the lower of the purchase price or appraised value, a low appraisal can create a gap that must be addressed before closing.

Fortunately, several options may be available:

1. Renegotiate the Sales Price
The seller may agree to reduce the purchase price to match the appraised value. This is often the simplest solution and is fairly common when market conditions favor buyers.

2. Bring Additional Funds to Closing
If the seller will not reduce the price, the buyer can choose to bring the difference between the appraised value and purchase price in cash. This is often referred to as an appraisal gap.

3. Meet Somewhere in the Middle
In many transactions, the buyer and seller negotiate a compromise and split the difference between the purchase price and appraised value.

4. Challenge the Appraisal
If there are factual errors or more appropriate comparable sales available, the lender may be able to request a reconsideration of value (ROV). While appraisals are rarely changed significantly, it can happen when important information was overlooked.

5. Walk Away From the Contract
If the purchase agreement contains an appraisal contingency, the buyer may have the option to cancel the contract and recover any earnest money deposit, depending on the terms of the agreement.

A low appraisal does not automatically mean the transaction is over. Most appraisal issues are resolved through negotiation between the buyer, seller, real estate agents, and lender.