Due to the downward trend of home values since the recent recession, home buyers have been facing a considerable challenge in dealing with low mortgage appraisals, which affects not only their mortgage options, but even the chance of the loan process falling through. While a lower-than-expected appraisal is not technically ‘wrong’, it may certainly reflect on whether a lender will approve the loan application or not.
As a rule, the appraiser is responsible for comparing home values with those of ‘comparable’ features within the surrounding market. Problems arise when a lender utilizes an appraisal agency that may not be familiar with the market conditions of a certain location, which will affect the home value. In turn, a particular market might be subject to high rates of foreclosures or short sales, or poor sales in general, which would cause an appraiser to ‘comp’ outside of the appropriate market.
The resulting appraisal affects the amount of funding the lender will allow toward the loan proceeds, and if the appraisal comes in below the loan pre-approval amount, the lender is forced to disqualify the loan. While the potential home buyer cannot direct or influence a property appraisal, there are procedures to challenge the results if necessary.
Steps to Challenging an Appraisal
Contract Cancellation – Most pending sales contracts have an appraisal contingency that permits buyers (and sellers) to cancel a contract due to a low appraisal figure.
Renegotiate – Buyers have the option of renegotiating an entirely new loan package. However, the seller must also accept the lower valuation, or the buyer may be forced to offer additional funds or concessions to meet the agreed sale price.
Challenge the Appraisal – The buyer can request a review of the appraisal, and provide any facts or details disputing the ‘comps’, or discrepancies in square footage or number of rooms to support the challenge.
Request a Second Opinion – If the resulting appraisal review or subsequent challenge does not alter the outcome, the buyer can request the lender to employ a different appraiser, and one that may be better acquainted with the specific housing market in the area.
If you follow these steps, you will hopefully get a new appraisal that will meet your expectations. If not, you will have to decide how you would like to proceed.