Q: We were looking to buy a home and stopped when the interest rates rose, making the homes we looked at unaffordable. Now that the prices have softened a bit, we found a home that fit our new budget and went under contract. Now our lender told us that the house appraised about $15,000 less than the purchase price. What happens now? —Diane
A: After you apply for a mortgage loan, the home you are buying will be appraised by your new lender to make sure it is worth what you are paying for it.
Lenders do this to ensure your new loan is adequately collateralized and the value will be there if they need to enforce their mortgage by foreclosing. Your lender will choose a licensed real estate appraiser to determine what the home is worth in the current market.
To do this, the appraiser will visit the property to see its condition and look at other factors, such as the size of the house and how much comparable homes in the area recently sold for.
Because your lender will give great weight to the value determined by the appraiser, it is hard to get them to re-evaluate the value if you think the appraiser made a mistake.
Most purchase contracts allow you to cancel the deal and get your deposit back when the property does not appraise for the purchase price.
But if you still want the house, you have two options.
First, you can try to get the seller to reduce the price to match the property’s appraised value. Many sellers will compromise since other potential buyers will have the same issue, and a buyer under contract for closing in the near future is often better than the delay and effort of putting the property back on the market.
If the seller will not budge on the price and you can do so, you can pay the difference out of your pocket. In this case, your lender will lower the loan amount to match the appraisal, and you will pay the difference at closing.
Since you are paying more than the home is worth on the market, make sure the new property is worth it.
