Appraisal Was Below Purchase Price: What Do I Do

Question: "I made an offer on a home, and my lender recently sent their appraiser out to determine the value. The appraisal was below the purchase price I agreed to pay. The lender is now unwilling to give me a mortgage to cover the purchase price of the home. What can I do in this situation?"

Having a property appraisal less than the purchase price is a fairly common scenario. Some sellers set their asking prices well above the true market value of the home. Sometimes this happens because the seller doesn't understand the current state of the real estate market, and how their home values have changed in recent years. Sometimes it happens because the seller is simply greedy and wants more for the home than it is worth.

Whatever the reason for overpricing, it can lead to a situation where the appraisal comes in below the mutually-agreed-upon purchase prices. So what do you do?

How to Handle a Low Appraisal

When the appraisal comes in below the purchase price, there are several things you can do:

* The seller can lower the price to meet the appraised value. This way, your lender will be willing to move forward with the loan.

* You can get a mortgage for the appraised value (or a portion of it) and then pay the rest out of your own pocket. I do not recommend this option, because it means you're paying more for a home than it's currently worth. Financially speaking, this rarely makes sense.

* If the sellers refuses to lower the purchase price to reflect the property appraisal, you can always walk away from the deal and look for another home.

In most cases, it makes sense to ask the seller to lower the price so the deal can move forward. This is in everyone's best interest. After all, the sellers probably want to sell the home as much as you want to buy it. So it only makes sense to keep the process on track.

But some sellers have their judgment clouded by greed, pride, or a lack of market awareness. So they might be unwilling to lower the price. In that case, you might have no option but to find another home to buy.

Using Comparable Sales to Validate the Price

Comparable sales will help you evaluate the seller's asking price. You or your agent should examine recent home sales in the area, with an eye out for properties that are similar to the one you are trying to buy. These "comps" are the key to determining the market value of a particular house.

* If the comps support the seller's asking price, but the appraisal still comes in low, then the home appraisal might be inaccurate.

* If the comps support the home appraiser's valuation, the seller might be asking too much.

In most cases, it's best to walk away from a deal where the homeowner is asking too much for a property.

But every home buying scenario is different, so there may be an argument for paying above the appraisal amount in certain cases.

Do you have a real estate agent? If so, you should ask them about the situation. A veteran agent has probably seen dozens of situations where the appraisal was below the purchase price, so they can give you some good advice on the subject. Just remember that at the end of the day, it's your investment and your choice.