After your offer is accepted, your lender will order an appraisal. It can feel like one more box to tick, but it answers a question that matters to you as much as to the lender: is this house actually worth what you agreed to pay? Here is what happens, what your rights are and what to do if the number is lower than expected.
Why the lender wants it
The home is the collateral for your mortgage. Before lending, the lender wants an independent estimate of its market value. An appraiser visits the property and estimates its value. Appraisers follow rules in arriving at a value, and lenders are not allowed to interfere with the appraiser’s judgment.
How appraisers arrive at a value
Most home appraisals rely on comparable sales: recent sales of similar homes nearby. The appraiser adjusts for differences such as size, number of bedrooms and bathrooms, lot, condition and updates, and arrives at an estimate for your home. That is why a home in excellent condition can appraise higher than a similar one that needs work, and why a very unusual home can be harder to value.
What the appraiser is not doing
The appraiser is not your home inspector. They note condition as it affects value, and some loan programs require the property to meet certain standards, but they are not testing the systems or looking for hidden defects. That is the job of the inspection described in The Home Inspection: A First-Time Buyer’s Guide.
Your right to a copy
For a first-lien mortgage, you have the right to a free copy of all appraisals and other written valuations of your home. Lenders must send it promptly once it is completed, and no later than three days before closing. If you have not received it, ask your lender. Read it: check that the basic facts, such as square footage and number of rooms, are correct, and look at which homes were used as comparables.
Tip: Small factual errors happen. If the report lists the wrong number of bedrooms or misses a finished basement, point it out to your lender in writing with evidence.
When the appraisal matches or exceeds your price
This is the simple case. The loan proceeds as planned. A higher appraisal does not lower your price, but it is reassuring evidence that you did not overpay.
When the appraisal comes in low
The Consumer Financial Protection Bureau is direct about this: it is very risky to purchase a home for more than the appraised value. A gap between the price and the appraised value does not go away on its own, so it usually has to be covered somehow. You have several options.
- Ask the seller to lower the price. The appraisal is strong evidence that the price was above market value, and it is often the best negotiating tool you will have.
- Meet in the middle. The seller lowers the price part of the way and you cover some of the gap with cash.
- Challenge clear errors. If the appraisal has factual mistakes or missed better comparable sales, ask your lender how to request a review.
- Cover the gap yourself. Possible, but think carefully before putting extra cash into a home that is not worth what you are paying.
- Cancel the sale. If the seller will not move, you may want to walk away. Depending on your contract, cancelling may carry costs, so check its terms first.
If you are unsure about your contract rights, consider talking to an attorney. An appraisal contingency, often part of the financing terms, is what gives you room to renegotiate or cancel without losing your earnest money.
Whatever you decide, watch the calendar. An appraisal contingency usually has its own deadline, and a renegotiation or a request for review takes time. Put the date in writing with your agent and lender as soon as the contract is signed, so a low number does not arrive after your chance to act on it has passed.
Repairs flagged in the appraisal
Sometimes the appraisal says the value is subject to repairs, especially for loan programs with property standards. If a major repair such as a new roof is needed, the lender can require it to be completed before closing, or ask for money to be set aside in a special account to pay for it right after closing. Talk with your agent and the seller early, because this can affect your closing date.
Different numbers from different sources
It is common to see one value on a real estate website, another from your agent’s market analysis and another in the appraisal. They use different methods and data. For your loan, the appraisal is the one that counts. Once it is settled, the last big step is closing: see Closing Day on Your First Home: What Happens and What to Bring.