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 a low appraisal.
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 -- the 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, and impact the activities of real estate agents and other professionals involved in the transaction.
While the issue of low appraisals waxes and wanes along with market conditions, the National Association of Realtors Confidence Index Survey currently reports that about 5% of real estate agents report that low appraised values disrupted a home sale.
Sometimes called an "appraisal gap", a 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 contract price. A delay in closing on a house could also mean paying above today's mortgage rates.
Some sales contracts may contain an "appraisal contingency" clause. This allows a buyer to back out of the deal or renegotiate the sales price if the appraisal should come in lower than the asking price of the home. In order to be more competitive against cash buyers, the National Association of Realtors noted that 25% of homebuyers in March 2024 waived the appraisal contingency.
How often do home appraisals come in low?
According to 2016 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 asking price of the home (an "appraisal gap"), it may be necessary for the buyer to change their 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 due to a change in the loan-to-value (LTV) ratio
- 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 property 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
In times when the housing market is sluggish with few or limited sales in an area,, it can be difficult for appraisers to have enough comps to effectively value a given property.
Four 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 homeowner in a refinance) is the one who can request a copy of the report 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 appraisal to the buyer.
2. Look for errors or discrepancies. 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.
New, More Formal Appraisal Dispute Process
In May 2024, both Fannie Mae and Freddie Mac's regulator (the Federal Housing Finance Agency) and the Federal Housing Administration (FHA) put in place guidelines for a more structured appraisal dispute process. In Fannie Mae's selling guide, this is referred to as "Appraisal Quality Matters", and most specifically "Reconsideration of Value" (ROV).
The new regulation states that "For loans requiring an appraisal report, the lender must have policies and procedures in place for a borrower-initiated reconsideration of value (ROV). At a minimum, the ROV process must meet Fannie Mae requirements and adhere to all applicable local, state, and federal laws."
It continues: "The ROV process must include a review and resolution procedure for the ROV request, and steps for the borrower(s) to appeal an appraisal when it is believed the opinion of value:
- is unsupported,
- may be deficient due to unacceptable appraisal practices, or
- reflects prohibited discriminatory practices.
Regardless of the outcome of the ROV, the mortgage lender is responsible for ensuring the appraisal report and opinion of market value are reliable and adequately supported. The lender must provide a disclosure to the borrower outlining the ROV process at the time of loan application and again when the appraisal report is provided to the borrower. The disclosure must make it clear that only one borrower-initiated ROV is permitted per appraisal."
A borrower-initiated ROV must include:
- Borrower(s) name
- Property address
- Effective date of the appraisal
- Appraiser name, and
- Date of the ROV request
- Identification and description of unsupported, inaccurate, or deficient areas in the appraisal report
- Additional data, information, and comparable properties (not to exceed five), and the related data sources (for example, the MLS listing number).
- An explanation of why the new data supports the ROV.
The lender has obligations to fulfill as well, taking the borrower's ROV and in turn formalizing its communication with the appraiser, including provision of the borrower's concerns, expectations for turn times for new a appraisal or reconsideration to be completed, and commentary on how valuation conclusions regardless of the outcome of the review, and lots more.
Be optimistic but realistic about your home value
When home values began plummeting in 2007, and real estate collapsed in 2008, inflated or incorrect property valuations were said to be at the heart of the issue. This saw the 2009 development of the Home Valuation Code of Conduct (HVCC) a set of standards establishing guidelines for the relationships between lenders and appraisers. HVCC was replaced by 2010's Appraiser Independence Requirements (AIR) standards, which updated and codified the issues addressed by HVCC. These reforms 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 Keith Gumbinger.
