APPRAISAL CAME IN $25K LOW. NOW WHAT?

The appraisal came in $25,000 low. Do you need another $25,000 to close?

Not necessarily.

That’s the part buyers need to understand before they start moving money around or assume the deal is dead.

A low appraisal can absolutely change the financing. But a $25,000 appraisal gap does not automatically mean the buyer has to bring another $25,000 to closing.

There may be several ways to solve the gap. The first step is understanding what that $25,000 difference actually does to the mortgage.

Why Does a Low Appraisal Change Your Financing?

Let’s say you offered $700,000 for a Denver home and planned to put 10% down.

At the $700,000 purchase price, that would look like:

• Purchase price: $700,000

• 10% down: $70,000

• Loan amount: $630,000

Then the appraisal comes back at $675,000.

For a standard Fannie Mae purchase transaction, loan-to-value is calculated using the lower of the sales price or appraised value. The lender will size the loan against the lower number, the appraised value.

That means the lender now evaluates that $630,000 loan against $675,000, not $700,000.

The loan that represented 90% of the purchase price now represents roughly 93.3% of the appraised value.

That is the problem we need to solve.

Notice what I didn’t say:

“You owe another $25,000.”

An appraisal gap and the amount of additional cash a buyer may need are not automatically the same number.

So Who Pays the $25,000 Appraisal Gap?

There isn’t one universal answer.

What happens next depends on the purchase contract, the financing, the buyer’s available funds, and what the buyer and seller ultimately agree to do.

A few different outcomes may be possible.

The Seller Could Reduce the Price

The seller may agree to lower the purchase price to the appraised value.

In our example, that would mean changing the price from $700,000 to $675,000. That completely eliminates the appraisal gap.

But a seller is not automatically required to reduce the price simply because an appraisal came in low. What the parties can or must do depends on the contract and its appraisal provisions, which is where your real estate agent should help you understand your options.

The Buyer and Seller Could Meet Somewhere in the Middle

It doesn’t necessarily have to be $700,000 or $675,000.

Maybe the parties renegotiate to $685,000. Now the gap above the appraised value is $10,000 instead of $25,000. That changes the problem considerably.

This is one reason I tell buyers not to look at a low appraisal and immediately assume they know what it will cost them.

First we need to know the final price. Then we can structure the financing around it.

Could the Buyer Bring More Cash?

Potentially.

A buyer who wants to proceed at a price above the appraised value may choose to use additional cash, subject to the loan program, contract, and available funds.

But here’s where the math gets interesting.

Go back to our original example. The buyer planned to put $70,000 down and borrow $630,000.

If the purchase stays at $700,000 and the buyer wants to maintain a 90% loan-to-value based on the $675,000 appraised value, a 90% loan would be:

$675,000 × 90% = $607,500

The difference between the $700,000 purchase price and the $607,500 loan would be:

$92,500

If the goal were to maintain that same 90% LTV, that would mean $22,500 more toward the purchase price than the buyer originally planned.

But maintaining the same LTV may not be the only financing option.

That is why I don’t want a buyer hearing “$25,000 appraisal gap” and immediately moving $25,000 around.

Let’s run the actual loan numbers first. The financing structure matters.

Could We Change the Loan Structure Instead?

Possibly.

Depending on the loan program and the buyer’s qualifications, we may be able to evaluate a different loan-to-value or down-payment structure. Keep in mind that a higher LTV can affect pricing, private mortgage insurance, or program eligibility.

Remember our original $630,000 loan? Against a $675,000 appraised value, that is approximately 93.3% LTV.

That doesn’t automatically tell us whether the loan works or doesn’t work. Maximum LTVs and other requirements depend on the mortgage program and transaction characteristics.

So instead of asking only “Where do I find another $25,000?” I want to ask: “What financing options do we still have?”

That is a very different conversation.

What If You Think the Appraisal Is Wrong?

An appraisal isn’t something we simply argue with because we wanted a higher number.

But there is a formal process called a Reconsideration of Value, or ROV.

For Fannie Mae loans requiring an appraisal, lenders must have a process that allows a borrower to request reconsideration when the appraisal is believed to be unsupported, inaccurate or deficient, or when prohibited discriminatory practices may have affected it. Supporting information can include relevant data or additional comparable properties.

For example, there could be a legitimate reason to take another look if:

• A material property characteristic was reported incorrectly.

• A relevant comparable sale wasn’t adequately considered.

• Information in the report is inaccurate.

• There is additional market data that may materially affect the analysis.

An ROV is not a request to “make the number work.” The value still needs to be supported by market evidence.

What About Your Appraisal Contingency?

This is where your purchase contract becomes extremely important.

Your rights, obligations, and negotiating options following a low appraisal depend on the language in the contract and any appraisal-related provisions or waivers.

That is a conversation to have with your real estate agent and, when appropriate, your attorney.

My role as your mortgage professional is different. I can show you exactly what the new appraised value does to your financing, how different purchase prices or loan structures change the numbers, and what those options could mean for your cash requirement and monthly payment.

Those two conversations should happen together, not in separate silos.

Before You Decide, Run the Numbers

This is the part I wish more buyers understood.

A low appraisal can feel like a crisis because the first thing everyone sees is the gap:

• $700,000 purchase price

• $675,000 appraised value

• $25,000 difference

But that difference alone doesn’t tell you what your next move should be.

Maybe the seller reduces the price.

Maybe you negotiate somewhere in the middle.

Maybe the financing can be restructured.

Maybe there is legitimate information supporting a reconsideration of value.

Maybe bringing additional cash makes sense for you.

Or maybe, depending on your contract and circumstances, you decide the numbers no longer make sense.

The appraisal gives us new information. It doesn’t make the decision for you.

The Bottom Line

If your appraisal comes in below your purchase price, don’t immediately assume you have to cover the entire difference.

Start with three conversations:

1. What does my contract allow?

2. What is the seller willing to negotiate?

3. What happens to my mortgage if the price or appraised value changes?

That last question is where I come in.

Before you move money, change your offer, or assume the deal is dead, let’s run the numbers. I’ll show you what the new value does to your financing and what mortgage options may still be available.

Schedule a Mortgage Strategy Call

DISCLAIMER

Information is for educational purposes only and is not a commitment to lend. Loan scenarios are illustrative and may not reflect the terms available to a particular borrower. All loans are subject to credit approval, program guidelines, property eligibility and underwriting requirements. Real estate contract rights and obligations depend on the specific contract and applicable law; consult your real estate professional or attorney regarding your transaction.