You're in contract to buy a house. You've been approved on the condition that the house will appraise high enough to support the loan. Now you have learned that the appraisal has come in too low, and the lender will not approve the loan.
You have a number of options.
For example. Your contract price is $500,000, and you want a loan which will be 80% of the purchase price -- or $400,000. Such a loan will help you avoid paying private mortgage insurance (PMI) premiums. However, the lender has appraised the house for only $480,000, and will only lend you $384,000
Here are some of your options.
1. Challenge the appraisal. You have the right to obtain a copy of the appraisal. Read it carefully, and discuss it with your real estate agent. You should then talk with the appraiser and/or the lender. If you believe there were errors in the appraisal, ask that the appraiser return to the property to reevaluate the situation.
2. Renegotiate the sales price. Go to the seller to show how much the house is really worth. Most times sellers will go with the appraised value.
3. Cancel the deal. Read your sales contract carefully. Most offers are made with an appraisal contingency. This clause let's you out of the deal.
4. Put up more cash. You originally intended to put down $100,000 of your own money and get a $400,000 loan. Since the lender is only willing to lend you $384,000, you can -- if you have the cash and want to use it -- put up the additional $16,000 (or $116,000), and still buy the house.
Keep in mind, however, that appraising property is not a science; at best, it is an attempt to determine what a piece of property is worth, based on a number of different methods of evaluation. While appraisers use such benchmarks as square footage, replacement value and other similar concepts, the bottom line in my opinion is that appraising a house is a very subjective exercise. Since no two houses are really similar, there has to be a lot of subjectivity involved in any assessment.
The best test of market value: what a buyer is willing to pay and a seller is willing to accept for the house.
Interested in finding out how to buy or sell a home? Meet with me and I can guide you through the process.
Ernest Villafranca, Ph: 510-418-9443 m, website: eastbaybetterhomes.com; oaklandhomesales.com. Hablo Español.