What Happens If Your Home Appraises Below the Contract Price?

If a home appraises below the contract price, the buyer's lender may be unwilling to finance the full amount of the agreed purchase price. This can create a financing gap that the buyer and seller may need to address through renegotiation, additional buyer funds, or other solutions allowed by the purchase contract.

Nora Pajian, a Colorado Springs Realtor with Engel & Völkers, helps buyers and sellers understand how appraisal results can affect a real estate transaction and what options may be available.

What Is a Home Appraisal?

A home appraisal is an independent valuation of a property, typically ordered by a lender when a buyer is financing the purchase.

The appraiser generally considers factors such as:

• Recent comparable sales

• Property size

• Location

• Condition

• Features and improvements

• Current market conditions

Why this matters

The lender uses the appraisal to help determine whether the property provides sufficient collateral for the requested loan.

What Does It Mean When a Home Appraises Low?

A low appraisal occurs when the appraised value is below the purchase price stated in the contract.

Example

Suppose:

• Contract price: $600,000

• Appraised value: $575,000

• Difference: $25,000

The lender may base its financing on the lower appraised value, depending on the loan program and other factors.

This doesn't automatically mean the transaction will fall apart.

Why Can a Home Appraise Below the Contract Price?

Several factors can contribute to a lower appraisal.

These may include:

• Limited comparable sales

• Changes in market conditions

• Differences between the property and comparable homes

• Unique property features

• Rapid price changes

• Improvements that aren't fully reflected in comparable sales

Why this matters

An appraisal is an opinion of value based on specific methodology and available information. It may not always match the negotiated price between a buyer and seller.

What Happens to the Buyer’s Financing?

A low appraisal can affect the amount a lender is willing to finance.

For example, if the lender's loan-to-value requirements are based on the lower appraised value, the buyer may need to bring additional funds to closing.

Why this matters

Buyers should discuss the specific impact with their lender because loan programs and underwriting requirements can differ.

What Can Buyers Do After a Low Appraisal?

Depending on the purchase contract and circumstances, buyers may have several potential options.

1. Bring Additional Funds

A buyer may choose to contribute additional cash to cover some or all of the difference, if financially feasible.

2. Renegotiate With the Seller

The buyer and seller may negotiate a new purchase price or other terms.

3. Challenge the Appraisal

If there are factual errors or relevant comparable sales that were not considered, the buyer or lender may be able to request a reconsideration of value.

4. Review the Contract

The purchase agreement may contain appraisal-related provisions that affect the parties' options.

5. Terminate If Permitted

Depending on the contract and applicable deadlines, a buyer may have a right to terminate the transaction.

The specific rights and remedies depend on the contract, so buyers should consult their Realtor and, when appropriate, a qualified real estate attorney.

What Can Sellers Do After a Low Appraisal?

A low appraisal can also affect the seller's plans.

Potential options may include:

• Reviewing the appraisal for factual errors

• Providing relevant comparable sales or property information through the appropriate process

• Negotiating with the buyer

• Considering a price adjustment

• Reviewing other contractual options

Why this matters

The best response depends on the size of the appraisal gap, the strength of the transaction, current market conditions, and the terms of the purchase agreement.

Can an Appraisal Be Challenged?

In some circumstances, a buyer or lender may request a reconsideration of value.

This may be appropriate when there are:

• Incorrect property details

• Incorrect square footage

• Missing improvements

• Incorrect comparable information

• Other factual errors

Important

A reconsideration request is not a guarantee that the appraised value will change.

Does a Low Appraisal Mean the Home Is Overpriced?

Not necessarily.

The contract price reflects what a particular buyer agreed to pay, while an appraisal provides an independent opinion of value for the lender's purposes.

The two numbers can differ for several reasons.

Why this matters

A low appraisal should be evaluated in context rather than automatically treated as proof that the property was incorrectly priced.

How Sellers Can Help Before an Appraisal

Sellers can work with their Realtor to make sure relevant property information is available through the appropriate channels.

This may include documentation regarding:

• Recent improvements

• Property upgrades

• Significant features

• Relevant comparable properties

Why this matters

Accurate information can help ensure the appraiser has a clear understanding of the property being evaluated.

How Buyers Can Prepare for an Appraisal

Buyers should understand their financing before making an offer.

Ask your lender:

• How does the loan program handle a low appraisal?

• What happens if the appraisal is below the contract price?

• How much additional cash might be required?

• What appraisal-related provisions are included in the contract?

Why this matters

Understanding your options before an appraisal issue occurs can make the situation easier to navigate.

Common Mistakes Buyers and Sellers Make

• Assuming the appraisal will automatically equal the purchase price

• Focusing only on the difference between the two numbers

• Ignoring appraisal deadlines in the contract

• Assuming a low appraisal automatically cancels the transaction

• Making financial decisions without consulting the lender

• Failing to review the purchase agreement

• Assuming a reconsideration of value will automatically change the appraisal

Frequently Asked Questions

What happens if a home appraises below the contract price?

The buyer's financing may be affected, potentially creating a gap between the loan amount and purchase price. The parties may then negotiate or consider other options allowed by the contract.

Who pays the appraisal gap?

There is no universal answer. Depending on the circumstances and contract, the buyer may contribute additional funds, the seller may agree to adjust the price, or the parties may negotiate another solution.

Can a seller refuse to lower the price after a low appraisal?

A seller may have the option to reject a proposed price reduction, but the specific rights of both parties depend on the purchase agreement and applicable law.

Can a buyer cancel because of a low appraisal?

Possibly, but it depends on the purchase contract, appraisal provisions, financing terms, and applicable deadlines. Buyers should review their contract with their Realtor and seek legal advice when appropriate.

Can you challenge a low appraisal?

In some circumstances, a reconsideration of value may be requested if there are factual errors or relevant information that was not considered. The lender's procedures will determine how the request is handled.

Key Takeaways

• A low appraisal doesn't automatically mean a transaction will fail.

• The appraisal can affect how much a lender is willing to finance.

• Buyers may need additional funds if the financing doesn't cover the contract price.

• Buyers and sellers may be able to renegotiate depending on the contract.

• Appraisal errors or missing information may sometimes be addressed through a reconsideration process.

• The purchase agreement and lender requirements should guide the next steps.

Buying or Selling a Home in Colorado Springs?

An appraisal is an important part of many financed home purchases, and knowing what can happen when the value comes in below the contract price can help you prepare for the unexpected.

Nora Pajian, a Colorado Springs real estate agent with Engel & Völkers, helps buyers and sellers navigate the transaction process and understand the factors that can affect a home sale or purchase.

Contact Nora today to discuss your Colorado Springs real estate goals.