Oh No! Your Appraisal Was Too Low. Here's What Happens Next

If you are getting a mortgage to buy a home, your lender is going to make you jump through a bunch of hoops to make sure you are qualified to pay back the likely hundreds of thousands of dollars it is lending to you.

A home appraisal is one of those hoops in most cases.

When you get an appraisal, a professional comes to the house to assess its market value by looking at its features and comparing them to recently sold homes. In most cases, this process turns out fine and the home appraises for the amount you've offered to pay for it or more. But, in about 1 in 10 cases, that's not what happens. Instead, the appraisal comes in too low.

If this happens to you, here's what happens next.

Your lender may not be willing to give you as much money

The big problem with a low appraisal comes when you are trying to get a mortgage. See, your lender is usually not going to loan you 100% of the home's value. It may lend you 80%, or 90%, or even as high as 97% depending on which loan you pick and your financial credentials. But you almost always have to put some money on the table (with few exceptions, such as if you're getting a VA loan).

The value of your home that the lender uses to decide how much to lend to you is not necessarily the amount you are paying. It's the amount the appraiser says your home is worth. So, say for example your lender required a 10% down payment and was willing to loan you a maximum of 90% of what the home is worth.

Now, say you were paying $450,000 for a house. You'd need to put $45,000 down and your lender would give you a loan for $405,000. But, if the home appraises for only $410,000, you have a problem. At this point, if you wanted to borrow $405,000 because you only had $45,000 to put down, then your lender would be loaning you 98.7% of what it believes the home is worth.

Your mortgage lender is not going to do that in most cases. Instead, it would most likely only be willing to give you a loan for 90% of $410,000, which is only $369,000. And, depending on your finances, this could be a huge problem.

Here are your options to fix the situation

If you find yourself with an appraisal that comes in too low, you have a few options:

• You could go back to the sellers and ask them to lower the price. Instead of you paying $450,000, you could tell them the appraisal only came in at $410,000 so that's all you're willing to pay for the house. They may agree to reduce the price if they think that other potential buyers would have the same issue, or they might say no and then this wouldn't be an option.
• You could walk away. If you made your offer contingent on -- or conditioned upon -- the home appraising for enough, you could back out of the sale and get back your deposit (hint: ALWAYS make your offer contingent on this!) Of course, this option means you wouldn't get the house.
• You could put more money down. If you want the house and your lender is only willing to loan you $369,000 but the seller won't accept less than $450,000, you'd have to put down $81,000.
• You could appeal the appraisal. Sometimes, lenders will allow you to appeal and request a re-estimate of the valuation. You should be prepared with comparable sales to show why you think the value was too low.
• You could look for another lender. The other lender may get the home appraised again and the amount could be different. Or it might have different loan-to-value rules. But you risk paying for an appraisal a second time, only to have the same problem arise.

The best course of action will depend on how badly you want the house, whether you think the appraisal is accurate, and how much money you have. It's not a great position to be in, but at least you do have some options to choose from.