If you’re looking to refinance your mortgage, you might hit a snag when your lender orders an appraisal to check the value of your home. Your lender will use the appraisal results to figure out whether you qualify for the refinance and can take out cash.
A low appraisal could hurt your chances of getting a new home loan, so it’s important to know what to look for.
Why low appraisals matter for refinancers
A home appraisal is a professional opinion of your home’s market value. Lenders usually order an appraisal while underwriting the refinance to make sure they’re not lending more than the home is worth.
And for a cash-out refinance the amount of equity in the home influences how much cash the homeowner can borrow.
A low appraised value might hurt your chances of qualifying for the new loan. Take a look at one example to see why:
Let’s say you apply for a rate-and-term refinance. You owe $200,000 on the original home loan, but your appraiser lists the value of the home at $180,000. Your mortgage lender would be nervous about taking on the $20,000 discrepancy.
That’s because if you fall behind on your mortgage payments and the home goes into foreclosure, your lender might not recoup that $20,000. This is why you want the appraised value to match or be greater than the purchase price of the home.
With a low appraisal, you also may not be able to remove private mortgage insurance (PMI), or the amount of cash you can borrow might be reduced. If the lender doesn’t approve your application, then you would need to go to another mortgage lender or hold off on the refinance altogether.
Good to know
The cost of an appraisal typically ranges between $300 and $500, and it will be included in your refinancing closing costs.
How to respond to a low appraisal
If you feel the appraiser got your home value wrong and the seller is unwilling to renegotiate the purchase price, you don’t have to accept the results. Here are some options for what you can do if the appraisal comes in low.
1. Study the appraisal report for errors
Your first step is to request a copy of the appraisal report if you don’t already have one. Many lenders use the seven-page Uniform Residential Appraisal Report.
Read through it, make sure everything is correct, and pay attention to information that could lower the appraised value. For instance, the number of bedrooms and bathrooms, the square footage, and any improvements you make will all heavily influence the results.
2. Check out the comparable sales
The appraisal report also lists which homes the appraiser used as comps. These are local recent sales that help appraisers gauge the value of your own home, so you’ll want to be sure the properties are truly comparable.
Here are some key points you’ll want to consider when looking over comps:
- Date of sale: Look at when the comparable home was sold. Because market trends fluctuate, it’s best to look at homes that sold within the last three to six months if possible. These will reflect the rising rates in your market. If your market is sluggish, check that the comps are the most recently sold homes near you.
- Comparability: The comparable home also needs to be similar to yours. That means it should have roughly the same number of bedrooms and bathrooms and a similar square footage. Even better if you can find homes with similar amenities and characteristics, such as a deck, finished garage, or strong curb appeal.
- Location: Ideally, the comparable home will be within a half-mile radius of your home. That’s because home prices can change considerably between neighborhoods. Check Google Maps to verify the comp’s location.
3. Consult with a real estate agent
The real estate agent who helped you buy the home might be willing to provide advice, so give them a call. Send over your appraisal report along with any notes you took. Your agent can help you figure out whether you should appeal the report, which has its own process.
4. Consider appealing the appraisal
Here are the steps you might take when appealing the home appraisal:
- Contact the lender. Call the lender to explain why you want to appeal the appraisal and ask about their process for submitting the appeal. Follow up with an email so you have everything in writing.
- Write out the complaint. Your real estate agent can help you create a report that lists any issues with the appraisal, whether it’s simple numerical errors or a larger issue.
- Check the follow-up report. If the report contains errors — such as the wrong address or square footage — the lender might be able to correct the report quickly and amend the value. But if there are larger issues with the appraisal report, you might need to order a new appraisal.
- Tell your state appraisal board. If you haven’t had luck with the lender but still feel the appraised value is too low, then find your state appraisal board and file a complaint.
5. Get a second opinion
Different appraisers might also have another opinion on the value of your home. If you order a new appraisal and your home value comes back higher, the new report can support your appeal. This may make it possible to qualify for the refinance loan.
Just make sure the second appraiser is qualified with the Appraisal Institute, American Society of Appraisers, or another national appraisal organization.
Reasons for a low appraisal
If a home appraisal comes in lower than expected, it may be due to:
Overestimating the value of property upgrades
Property upgrades can increase your home’s value, but you might not recoup all of the money you spent on these projects.
For instance, you could spend $15,000 installing a deck, but the appraiser might decide it’s only worth a $10,000 boost in the property’s value. Or worse, the appraiser might not even know about what you’ve done to improve the home.
Tip
You can get around this by creating a list of upgrades you’ve done, along with receipts and photos if you have them, and giving it to the appraiser.
The home is cluttered
Clutter isn’t supposed to affect the home’s value — unless it begins to affect the structural condition of a home or gets in the way during the appraisal. Appraisers might also be influenced by first impressions, so a messy home, on the inside or outside, may ultimately lower your home’s value.
Tip
Before the appraisal, give yourself plenty of time to eliminate clutter, clean the outside and inside, make any necessary repairs, and generally improve the curb appeal.
Unusual market conditions
If the real estate market in your area is moving faster than normal, the appraisal values could lag market prices. That’s because an appraiser compares your home to others that recently sold in the area, and backward-looking data might not keep pace with current prices in a hot seller’s market.
The opposite could be true, too, if your housing market is sluggish. With fewer buyers and more homes on the market, the value of your home could drop.
Tip
Dealing with unusual market conditions might be unavoidable, but it will help to research what’s going on in your area. Home sales are generally faster and priced higher during the summer, which could help boost your own home’s valuation.
An inexperienced appraiser
A low home value could also be attributed to an appraiser who lacks experience. They might rush through the job during busy times, use poor comparable sales data (also known as "comps"), or lack knowledge about your market or the appraisal process.
It might also be the appraiser’s first time valuing the type of home you own, such as a condo or single-family house.
Tip
Avoid this by meeting with the appraiser at your home. You can share comparables, explain problems, and provide information about your home.
How often do home appraisals come in low?
If the appraisal comes in low and the seller doesn’t budge on the sales price, you might not qualify for the refinance. But this doesn’t happen often.
According to data from Fannie Mae, home appraisals come in below the asking price only about 8% of the time. And when they do come in low, the borrower is usually able to renegotiate a purchase price in their favor.
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Understanding home appraisals
Home appraisals are an essential part of the home-buying process and are commonly used in refinances. While they may set you back a couple of hundred dollars, they’re often to your benefit as they ensure you’re not borrowing more than you need.
Since home appraisals are done by a third party, you can rest assured that you’re receiving an unbiased opinion on your home’s value. They’re also different and more legitimate than the home value estimators you find online. Only a licensed professional can conduct a home appraisal and give you an accurate report of your home’s value.
Refinance options without a home appraisal
No-appraisal refinances are uncommon, but you might be able to get one in certain cases. Here are a few options you might qualify for if you’re looking to get a no-appraisal refinance:
- Appraisal waiver: If your mortgage is owned by Freddie Mac or Fannie Mae, you may qualify for an appraisal waiver. No cash-out refinances have a better chance of receiving an appraisal waiver than cash-out refinances.
- Fannie Mae’s RefiNow and Freddie Mac’s RefiPossible: These refinance programs provide a $500 credit if you obtain a home appraisal during underwriting. They also have generous debt-to-income ratio limits — up to 65% DTI — making it easier for you to qualify.
- Streamline refinance programs: Government-backed loans have streamlined refinance options that don’t require an appraisal in most cases. For instance, both a VA streamline (IRRRL) refinance and an FHA streamline refinance generally don’t require credit checks or a home appraisal.
Keep Reading: How to Refinance Your Mortgage in 6 Easy Steps
