How to Navigate a Home Appraisal Below Expected Value
When the home appraisal comes in lower than what you expected, the immediate reaction can be panic or frustration. However, with the right steps, you can navigate through this situation and either proceed with the purchase or walk away, leaving both parties satisfied.
Understanding the Challenges
When the home appraisal comes in lower than the contract price, this can significantly impact the mortgage process. Depending on the contractual terms and negotiations between the buyer and seller, the sale may not go through as originally planned. This is especially true if the contract does not include an appraisal or financing contingency.
Contractual Provisions
If the sales contract contains specific provisions, such as an appraisal or financing contingency, you have the option to back out of the deal if the appraisal falls short. For example, if you purchased the house for $300,000 but the appraisal comes in at $250,000, you can use the contingency clause to exit the deal. However, if you still wish to proceed with the purchase, you have several options to consider.
Financing Options
One of the main issues in such a situation is the amount you can finance. If the appraised value is lower, the loan amount might also need to be reduced. Here are a few steps you can take to address this issue:
1. Increase the Down Payment
If you have the financial means, increasing your down payment can help you close the deal. For instance, if your initial plan was to put down 20% of the purchase price (and finance the remaining $240,000), but the appraisal value is only $200,000, you would need to pay $100,000 upfront instead of the assumed $60,000. This would bring your total investment to $300,000.
2. Negotiate with the Seller
The seller may be willing to lower the price to align with the appraised value. This negotiation can involve finding a compromise value that both parties can agree on. For example, you might suggest that the seller reduce the price from $300,000 to $275,000, which is the appraised value. This way, both parties can still close the deal at a balanced price.
3. Alternative Financing
Another option is to explore alternative financing options that require a lower down payment. You might look for flexible loans that permit you to put down a smaller percentage of the home's value. For instance, you could find a mortgage that requires just 10% or 15% down payment.
4. Second Mortgage
In some cases, the seller might be willing to provide a second mortgage to help you cover the shortcoming. This could be with deferred payment terms, allowing you to pay it back over time. For example, when I bought my first house, a real estate agent loaned us her commission to help bridge the gap. This could be a viable solution if the seller is willing and able to extend credit in this manner.
5. Equity Sharing
You could also consider an equity sharing agreement, where you and another party share ownership of the home but contribute different amounts to the down payment. For instance, you could provide your planned $60,000 down payment while a partner contributes the remaining $40,000. This approach could be structured in a way that you have the option to “buy back” the investor’s portion of ownership later on.
Conclusion
When facing a lower-than-expected home appraisal, you have several strategic options to navigate the situation. By understanding your contract, exploring alternative financing options, and engaging in negotiations, you can either finalize the purchase or choose to walk away, ensuring that both parties come to a mutually beneficial agreement.