Thanks to a real estate market that continues to shine, many U.S. homeowners have been enjoying rising home values. Even so, prospective homebuyers and refinancers may still encounter the obstacle of low appraisals.
When you buy or refinance a home, mortgage lenders require an appraisal in order to properly assess the property's worth and ensure the value connected to the collateral being used -- your home.
What happens if an appraisal is too low?
The issue of a low home appraisal should be of interest to more than just prospective buyers and existing homeowners. An improper valuation can derail a homebuyer's mortgage loan, disrupting a home's sale for the seller, not to mention both real estate agents involved in the transaction.
In fact, according to the National Association of Realtors, each month roughly 1 out of 10 real estate agents report that low appraised values disrupted a home sale. Low appraised value can mean a canceled sales contract. Lenders may not be able to approve a mortgage loan if the appraisal is less than the home's contracted sales price. A delay in closing on a house could also mean paying above today's mortgage rates.
How often do home appraisals come in low?
According to research by Fannie Mae, home appraisals come low about 8% of the time. The Fannie Mae study also showed that this figure expands and contracts over time as local housing market conditions change. The factors that help create low appraised values change along with local housing market conditions, but include everything from bad neighbors with unkempt properties to a lack of highly comparable homes ("comps") for sale in the market.
If a homebuyer receives an appraised value below the purchase price of the home, it may be necessary to change the game plan and pay the difference in cash, get the seller to agree to a lower selling price, or have a second appraisal performed on the property using a different appraiser.
A low appraisal can impact the purchase or sale of a home, as well as a refinance, in three ways:
- The interest rate offered on a mortgage loan may change
- Whether or not private mortgage insurance (PMI) is required
- The difference in whether or not a cash-out refinance is still possible
Factors considered in home appraisal
What if you believe your home or home-to-be is worth more than the appraisal shows? Can you challenge a low home appraisal?
First, understand how or why appraised values are determined. Here are some factors an appraiser may use when appraising a home:
- Sales prices of similar homes in close proximity sold in the past six months or less
- Average time for homes to sell in the subdivision or general neighborhood
- Price and value trends of homes nearby - values trending upward or downward
- Supply and demand of homes in current market - shortage or surplus of homes
- Property condition and construction quality
- Square footage and gross living area of home
- Traits of home including bedrooms, bathrooms and distinct features
- Major home improvements since purchase date
- Lot size relative to other homes in general area
- Property zoning
- Home uniqueness - good or bad way
- Functional obsolescence
4 steps to dispute a home appraisal
What can you do if you disagree with the appraiser on any of these items? Can you appeal a low home appraisal, and if so, what is the appraisal dispute process? Tip: telling the appraiser, "You're wrong" isn't generally the best approach.
Instead, in order to have any hope of overturning an appraiser's opinion, gather concrete evidence, including different data than the appraiser used. Here are four steps that can help challenge a low home appraisal:
1. Get a copy of the appraisal. You can only challenge the paperwork if you know what information the appraiser used. While sellers won't have access to the appraisal, the individual who pays for the appraisal -- typically the buyer in a purchase or refinance -- is the one who can request a copy of the appraisal and review it.
According to the Bureau of Consumer Financial Protection (CFPB), the mortgage lender is required by federal law to provide a copy of the report to the buyer.
2. Look for errors. It's important to remember that appraisers are human, and appraisals are opinions of value. It is very possible that the appraiser made one or more honest mistakes.
According to Sara Stephens from The Appraisal Institute in Little Rock, AR, "You should check the comps to be sure they have geographic relevance and the same interior and exterior features." Stephens goes on to say, "You can also hire another appraiser to do a review of the appraisal for an additional cost."
You can also enlist the help of a Realtor. With the help of a real estate professional or an appraiser, buyers can see if your home is placed in the wrong subdivision or neighborhood, square footage is miscalculated, lists incorrect square footage or shows fewer bedrooms and/or bathrooms than is the case.
Provide documentation to support the different "comps," or point out mistakes regarding such items as the amount of square feet or the number of bedrooms.
3. Point out upgrades and improvements. A home appraiser is in your house for a short time and might miss improvements or upgrades you made that add value to your home. Don't assume that just because you're aware of the renovations that took place in your home that an appraiser notices them all.
Talk to the appraiser about these improvements or upgrades in a way that is more informative than condescending. Remember, this is a people business; develop a working rapport with the appraiser and make their job easier by providing a list of improvements and the money spent on each.
4. Request a second appraisal. "If a challenge or a review doesn't change the appraisal, then a buyer can ask their lender to hire another appraiser," says Stephens. "Be sure to request someone with geographical knowledge and explain why you are asking for a second appraisal."
Either the buyer or the seller can challenge an appraisal or request a second appraisal. "A challenge should be based on specific errors rather than opinions," notes Stephens.
Be optimistic but realistic about your home value
When home values began plummeting in 2007, and real estate collapsed in 2008, the Home Valuation Code of Conduct (HVCC) went into effect in May 2009. This reform changed a lot of rules for appraisers, real estate professionals, mortgage lenders and homeowners.
How often do appraisals get changed? Most experts say it doesn't happen often. However, the benefits of a proper home valuation doesn't just end with a purchase or sale of a home. Refinance loans, home equity lines of credit, insurance premiums and property taxes are all based on appraised value.
With accurate valuations from your appraisal influencing so many other factors, it may be well worthwhile to challenge a low home appraisal.
This article was updated by Craig Berry and revised by Keith Gumbinger.
