One of the most significant steps in the home buying process is the appraisal. When you are buying a home, the mortgage lender needs to determine whether the home you are trying to purchase is worth the amount that you are offering to spend. They accomplish this through a home appraisal. 

The appraisal is conducted by a home appraiser to determine the property’s value. They will inspect all components of the property including the structure, interior of the home and the landscape. Any damage to the home can result in a decreased value. The appraiser will also check the amenities of the home and any upgrades that might have been added. 

The Importance of the Appraisal

As the buyer, you have made an offer that the seller has agreed upon. Before an agreement was finally reached, there was likely a counter offer presented in response to your original offer. The only thing that hinges on whether or not you will be paying this price is the appraisal. Any difference between the appraisal and initial purchase price could change everything for both the buyer and seller. In fact, it can actually make or break the deal.

The Appraisal Has Come Back Low, Now What?

In a perfect world, the appraisal will come back in the same range as the set purchase price. Problem is, we don’t live in a perfect world. Due to the level of uncertainty, the appraisal can be a nerve-racking time for a buyer and seller. In this step lies a major risk that the appraisal will come back lower than the purchase price. What does that mean for you as the buyer? 

You Have to Make Up the Difference

If you make an offer on a home for $235,000 and the appraisal comes back setting the value of the home at $230,000, someone has to make up the difference. You will still be approved by your mortgage lender for a home loan, but they will only provide you with the value of the appraisal. This means that there is a $5,000 difference between your loan and the purchase price.

You are now left with several options; one being that you can make up the difference out of your own pocket. This means that you will be expected to have the extra funds necessary to close on the house and finish the purchase. While this is not ideal for a buyer, you might find yourself in a very competitive market and in no position to negotiate. If you are unable to provide the extra cash, your contract will be void and the purchase of the home will no longer happen.

Negotiating the Contract

Depending on the situation, you may be able to renegotiate the contract. The best possible scenario for the buyer is that the seller will drop the price to meet the appraisal. This means that the buyer will not have to pay an extra charges out of pocket and their home loan will now match the full amount of the purchase price. 

At this point, the contract is up for renegotiation. If they originally offered to help with the closing costs, they might retract that offer in the new contract due to the price drop. This, and any other agreements could change throughout the process of renegotiating the contract. 

What Happens if Negotiations Aren’t Met?

“There is good news”, says Robert Palmer, host of the Saving Thousands Radio Network. “If you do not reach a new agreement with the seller or can’t make up the differences yourself, you are granted the opportunity to back out of the contract with no harm. If so, you will actually get all of the money back that you have put into buying this particular home.”