What happens if a home doesn’t appraise for its purchase price?
Last year, homes appreciated by almost 8%. Historically, homes usually rise in value by around 2% to 4%, so that shows that our market is very strong. This appreciation is driven by our extremely low inventory as well as our low interest rates, which draw more buyers to the market. The fact that there are more buyers and fewer homes means that home values are on the rise.
So what happens if someone agrees to buy a house for $200,000 and it only appraises for $190,000? If that happens, the bank will not issue the buyer a loan because they don’t want to loan more money than an appraiser says the home is worth. There are a few ways to address this:
First, the buyer could agree to bring more money to cover the difference. In the example I gave, the buyer could put an extra $10,000 down for their down payment and take the loan for $190,000.
“More buyers and fewer homes mean that home values are on the rise.”
But since buyers don’t typically have an extra $10,000 laying around, and sellers often aren’t willing to drop their asking price by $10,000, the buyer and seller can negotiate to meet somewhere in the middle. If the buyer’s loan is an FHA or VA loan, the appraisal will stick on the property for six months. If they can’t come to terms and the seller winds up putting the house back on the market, that means they can’t accept a VA or FHA buyer for that time, since the house will only appraise for $190,000.
Now if the buyer uses a conventional mortgage, the appraisal won’t stick to the property. In that case, the seller could put the house back on the market and sell it to someone else, which will restart the financing process and allow for a new appraisal to be done. Alternatively, if the buyer feels that the $200,000 asking price is justified, they could ask for another appraisal to be done, or they could switch lenders, which would also restart the financing process.
Typically, our team sells around 300 homes a year, and we see this conflict come up only three or four times a year. However, in the last few weeks, we’ve already had it happen two times. All in all, homes are appreciating at a fast clip; hopefully, this isn’t a trend that continues throughout the year.
If you have any questions about appraisals or real estate in general, don’t hesitate to reach out to me.