Home Appraisal Amount Vs. Loan Amount: How An Appraisal Impacts The Selling Price And Mortgage Amount

No matter where you are in the home buying process, an appraisal can help you purchase your future home at the right market value. A purchase appraisal can also affect both the selling cost and mortgage amount.

Home Appraisals: A Brief Overview

An appraisal is the best way to estimate a property’s fair market value. Beyond an estimate of how much a property is worth, an appraisal also indicates the amount a lender will let you borrow for a property.

A licensed appraiser analyzes a handful of factors when viewing the home. They’ll look at where your desired home is, comparable sales in the area, the condition of the home’s construction and any of its amenities or special features. The appraiser also looks at the size of the property and any major structural improvements such as additions and remodeled rooms.

Appraisal Amount Vs. Mortgage Loan Amount

An appraisal directly affects the amount of your mortgage loan that you can qualify for. This is because your lender gives you a home loan based on collateral, which is the value of your future home. In other words, it’s your home appraisal’s estimate of the home’s fair market value. It keeps the lender from lending you too much money and keeps you from borrowing more than the value of your home.

• Appraisal amount: This is an estimate (calculated by an appraiser) of how much your home is worth and reveals how much a lender can let you borrow for a home loan.
• Mortgage loan amount: This is the amount a lender will allow a borrower to take out in order to buy property.

If A House Is Appraised Lower Than The Purchase Price

What happens if the appraisal comes in below the purchase price of the home you want to buy? Though it might be an unexpected scenario, it’s best to be prepared.

A low appraisal doesn’t mean that a lender won’t lend you money. It means that your lender will give you a loan based on the loan-to-value ratio (LTV) agreed to in the proposed contract. The LTV compares the size of the loan you’re getting with the value of the home.

For a home priced at $150,000, what happens when the appraised value comes back at only $100,000? Since your agreed-upon price is $150,000, and your lender won’t lend more than the appraised value, you’ll have to make up the difference or work with the seller to see if they can reduce the asking price to the appraised value.

How LTV Works When The Appraisal Matches The Home Price

Let’s take a look at a quick example of how LTV works when the appraisal comes back right on target with the home price.

The home you’d like to buy is appraised at $150,000. You and the seller agree that you’ll buy the home for $150,000. In addition, you tell your mortgage lender that you’re making a down payment of $20,000.

Here’s how to calculate your LTV:

• Subtract your down payment ($20,000) from the total selling price ($150,000) to get $130,000. This is the amount you plan to borrow.
• Next, divide your loan amount ($130,000) by the value of the property ($150,000) to get 0.866.
• Multiply that result by 100 to get your LTV. In this case, the LTV is 87%.

If A House Is Appraised Higher Than The Purchase Price

What happens if the appraisal comes in above the purchase price of the home? You’re in a good situation if this happens. It simply means that you’ve agreed to pay the seller less than the home’s market value. Your mortgage amount doesn’t change because the selling price won’t increase to meet the appraisal value.

Appraised Value Of A House Vs. Sales Price

Unlike the listing price, the home’s appraised value may not be what sellers are asking for their home. Lenders will only allow a loan amount based on how much the home is worth on the appraisal report.

As you can imagine, it’s in the seller’s best interest to try to get the home appraised for a value that matches the selling price. If an appraisal comes back low, a buyer can go back to the seller and negotiate a lower sale price or walk away from the sale entirely. For the buyer and seller to both get what they want – a home that sells – the seller may seriously consider lowering the price.

How Can Sellers Avoid Hurting Their Appraisal?

If you’re selling a home while looking for a new one, here are a few things you can do to make sure you don’t hurt your appraisal:

• Clean your home. The cleaner it is, the more its great elements will stand out to an appraiser.
• Double-check items that leave a first impression of your home. These could include the paint on the walls, handrails, railings on decks, plumbing, roof leaks and cracks in the walls, ceiling or foundation. Check the foundation for water or other issues.
• Make known repairs before an appraiser arrives. If you know the roof has some leaking issues or the basement needs repair, make those repairs ahead of time.
• Organize receipts and take photos of any renovations or improvements. New appliances and other new features, such as repairs to the leaky roof, should be kept as proof of valuable home improvements.

How To Handle A Low Appraisal Value As A Buyer

If you’ve agreed to pay more for a home with a low appraisal, what are your options? Here are a few routes you can take if the appraisal does come back low.

1. Renegotiate the sales price. If you can’t dispute the appraisal, you can contact the seller and ask them to lower the sale price.
2. Properly petition for a review. A lender, buyer or seller can’t ask an appraiser to give the property a specific value. But if you work with your agent to provide evidence of errors in the appraisal and the lender finds your request is well supported, they may ask the appraiser to take a second look.
3. Keep your eye on the house. If a deal falls through, the seller might have a hard time getting higher offers from other buyers. They may come back to you to negotiate. Keep an eye on the home just in case the sellers don’t receive any more offers.

FAQs About Appraisal Amount Vs. Loan Amount

As a home buyer, you may be concerned about what home appraisals and the seller may do in the case of a home appraisal discrepancy. Here are some common questions home buyers are also asking.

Can the seller back out if the appraised value is too high?

The conditions of the offer contract will determine when the buyer and seller can back out of the purchase. However, the seller may simply want to renegotiate if the appraised value comes back significantly higher than the selling price.

Do sellers usually lower their asking price if the appraised value is lower?

Whether the seller decides to lower their asking price will depend on a number of factors, including how motivated they are to sell or if they have other offers above asking price.

Does the appraisal amount need to match the loan amount exactly?

No, the appraisal amount doesn’t need to be the same as the loan amount, but lenders are going to look at the appraisal amount to learn the fair market value of the home. Once they check the loan-to-value ratio to see if it makes sense, lenders can then allow the transaction to go through.

Lenders want to lower their risk, so they consider how much the loan is worth compared to the value they currently have – in this case, the appraised home value or a down payment will make up that value for the lender. The higher the better.

Can I walk away if the home doesn’t appraise for the amount I’ve agreed to pay?

An appraisal contingency clause in your purchase agreement means that you can walk away from a low appraisal on a home without losing money, so make sure your purchase agreement contains an appraisal contingency to be absolutely safe. If the home doesn’t appraise for the amount you’ve agreed to pay, sometimes walking away is the smartest and safest thing you can do.

The Bottom Line

Now that you have a better handle on home appraisals and how appraisal amounts can affect selling prices and loan amounts, you may be wondering what your next steps are as a potential home buyer. A good place to start is to move forward with initial approval so you have an idea of how much you can afford on a mortgage.

Apply for initial mortgage approval today with Rocket Mortgage^®.