What happens if the bank’s appraisal comes in too low? As a buyer or seller in NYC, you may be wondering what options exist if the appraised value is below the contract price. In this article, we explain everything from how the appraisal rebuttal process works to how to prevent a low appraisal in the first place.
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What happens if the appraisal is lower than the purchase price?
If an appraisal comes in lower than the sale price, it means that the buyer’s bank will only issue a mortgage based on the appraised value as opposed to the purchase price. This results in a financing shortfall (also known as an appraisal gap) for the buyer.
Here is an example of what happens if the appraised value comes in below the offer price:
Contract Price: $800k
Appraised Value: $750k
Bank’s Loan to Value (LTV): 80%
Original Loan Size: $800k x 80% = $640k
New Loan Size: $750k x 80% = $600k
Shortfall = $640k – $600k = $40k
The shortfall of $40k represents a financing (appraisal) gap for the buyer. Because banks don’t typically increase the ‘Loan to Value’ (LTV) as a response to a low appraisal, it means that the financing shortfall must be covered through the buyer putting down an extra $40k on the purchase.
If the buyer has an appraisal contingency or a minimum loan amount contingency, it means that he or she is entitled to cancel the contract as a result of a low appraisal. However, most buyers and sellers will make an effort to keep the deal alive by utilizing any number of low appraisal response strategies which we explain below.
What are next steps if an appraisal comes in too low?
There are a number of strategies for responding to a low appraisal in New York City. We explain each approach in detail below:
Option 1: Buyer increases his or her down payment
The easiest response to a low appraisal in NYC is for the buyer to increase his or her down payment to cover the appraisal gap. If the appraised value is extremely close to the contract price, most buyers should be amenable to putting slightly more down on the purchase.
If the appraised value comes in way lower than the purchase price, most buyers will be resistant to increasing the down payment. If you are buying a co-op apartment, increasing the down payment will reduce your post-closing liquidity and put you at risk of not meeting the co-op board’s financial requirements.
Option 2: Seller lowers the contract price
The easiest way for the seller to solve a low appraisal situation is to agree to reduce the contract price to the appraised value. Most sellers will be resistant to this idea, especially if they feel that the appraisal is inaccurate and out of touch with the market.
The most common approach is for the buyer and seller to renegotiate the contract price. One common proposal is for the buyer and seller to meet in the middle and set the new contract price as the midpoint between the appraised value and the original purchase price.
Option 3: Buyer applies for a mortgage with a new bank
If the buyer and seller cannot agree on a new contract price, the easiest next step is for the buyer to apply for a mortgage with another bank. Applying with a new bank means that another appraisal will be ordered.
Apply With Another Bank
Often times buyers are resistant to applying with another bank since they will have to pay for another appraisal. In addition, a buyer who has secured an attractive interest rate lock will be even less interested in applying with a new bank (presumably at a higher interest rate) later down the line. Furthermore, applying with a new bank can often delay the co-op board approval process by two to three weeks.
Option 4: Buyer submits an appraisal rebuttal (reconsideration)
Submitting an appraisal reconsideration with the buyer’s lender is another way to respond to a low appraisal. Most appraisal challenges will only be seriously considered if there are factual errors in the appraisal or if the appraiser did not include the most relevant comparable transactions. We explain the process for an appraisal rebuttal in detail below.
How can I contest a low appraisal in New York City?
A buyer can contest a low appraisal in NYC by submitting an appraisal reconsideration with his or her lender. The appraisal appeal process typically takes around two weeks. The first step in an appraisal appeal is for the buyer, seller, listing agent and the buyer’s agent to thoroughly review the appraisal provided to you by the lender.
Look for Factual Errors
When reviewing the appraisal, the most important things to look out for are factual errors and key comparable transactions omissions. Most banks will only allow the buyer to contest the appraisal if there are factual errors in the appraisal or key omissions in the comparable transactions. Some examples of factual errors include incorrect square footage and inaccurate room and/or bedroom count for the comparable properties.
It typically takes around two weeks to hear back from the appraiser once the buyer has submitted the items for the challenge to his or her mortgage banker. When the challenge is complete, the appraisal firm will provide the buyer with an ‘Appraisal Reconsideration Response’ which responds to each additional comparable or factual error presented by the buyer.
The Appraisal Consideration Response will provide for one of the following outcomes:
GCR (Geographically Competent Review) concluded no change in value as the appraisal report’s stated opinion of value and quality is acceptable.
GCR concluded the appraisal report’s revised value of $[ ] and quality is acceptable.
GCR concluded an opinion of value of $[ ]
GCR concluded the appraisal’s quality is unacceptable and/or is unable to determine a value.