Appraisals and low values
The short version
The lender orders an appraisal to confirm the home is worth what you are paying. A licensed appraiser inspects the home and compares it with recent nearby sales, adjusting for differences in size, condition, land and features. You cannot choose the appraiser, and neither can we. This keeps the value independent.
Your loan is based on the lower of the price or the appraised value. If the value comes in under the price, the gap is not financed. You have several options:
- Ask for a reconsideration of value with better sales the appraiser may have missed.
- Renegotiate the price down to the value, or agree on a price in between.
- Cover the gap in cash, in addition to your down payment.
- Cancel the contract, if your appraisal deadline has not passed.
FHA, VA and USDA appraisals also review the home's condition and can require safety repairs before closing.
Small acreage, wells, shops and barns are common in Southwest Colorado, and appraisers who work in the area see them regularly. Unusual properties are more difficult, such as a custom home on a large parcel, a log home, or a home far from recent sales. If you are buying a one-of-a-kind property, tell us early so we can choose a loan and timeline that fit. You can also expect the appraisal to take longer than it would in a city.
Go deeper
How a reconsideration of value works
Fannie Mae, Freddie Mac and HUD set a standard process in 2024. The lender must give you a way to submit one, we handle the request for you, and you are allowed one request per appraisal. A strong request identifies the specific errors and includes up to five better comparable sales, with an explanation of why each one fits.
The lender reviews it and sends it to the appraiser. The value may or may not change, and a request that does not change the value does not entitle you to a new appraisal.
VA has an additional early step called Tidewater. When the value appears likely to come in below the price, the appraiser notifies the lender before finishing, and your side has a short window, usually two business days, to send sales that support the price.
How much cash a gap takes
For example, suppose you agreed to $300,000 with 5% down, and the home appraises at $290,000. Your loan is now based on $290,000, so the most you can borrow at 5% down is $275,500. You would need $24,500 down instead of $15,000. That is $9,500 more, which is nearly the entire gap.
This is why it is worth renegotiating before you use your savings. If you do cover a gap, keep enough cash for closing costs and reserves.
FHA and VA purchases include a clause that lets you cancel without losing your earnest money if the appraisal comes in below the price. With other loans, your protection is the appraisal deadline in your contract.
Rural appraisals
When there are few sales nearby, appraisers may use sales from farther away or further back in time, and they explain why. They adjust for land, outbuildings, water and access.
You can help. Before the appraisal, give us a list of improvements with dates and costs, such as a new roof, a well pump, a shop or irrigation. We pass it to the appraiser through the lender. You cannot discuss value with the appraiser directly, but it is appropriate to share facts about the home.
If you are paying well above recent sales, you can expect the appraisal to test that price.
See it with your numbers
If the value comes in low, your Mortgage Plan can be updated so each option shows the new loan, payment and cash to close.
Already have a Mortgage Plan? Open your link, or text Daniel.
Back in your Mortgage Plan, see this with your own numbers.
