Home Appraisals: How They Work and What If It Comes In Low

A home appraisal is the lender's independent estimate of what the property is worth, and for a purchase the lender bases your loan on the lower of the price or the appraisal. If the appraisal comes in low, you can renegotiate the price, pay the gap in cash, or ask for a reconsideration of value with better comparable sales.

You also have a federal right to a free copy of every appraisal on a first-mortgage loan before you close.

Who orders the appraisal and who controls it

Your lender orders the appraisal and chooses the appraiser, and you typically pay the fee as part of your loan costs. Federal rules keep the appraiser independent: under Regulation Z, no one involved in the loan may try to influence the value. That is why you, the seller and the brokers can't call the appraiser to argue the number.

The same rule lets a lender ask the appraiser to consider additional information, correct errors, or explain how they reached the value. That is the basis for a reconsideration of value, covered below.

How the appraiser chooses comparable sales

For homes and apartments, appraisers lean on the sales comparison approach: recent closed sales of similar properties nearby, adjusted for differences. In NYC that typically means:

• Same building or very close by. For co-ops and condos, sales in the same building or the same block are the strongest evidence.
• Recent. Closed sales, not listings or contracts. A market that moved quickly can leave closed comps looking stale.
• Similar. Size, bedrooms, floor, light and view, condition, outdoor space and building amenities. The appraiser adds or subtracts dollars for each difference.

You can see recorded NYC sale prices yourself. Search the building on Roofy's sales records or in ACRIS (see finding sale prices in ACRIS).

Why a low appraisal changes the cash you need

Lenders set loan limits as a percentage of value (the loan-to-value ratio, or LTV). On a purchase, Fannie Mae's rule is that the value is the lower of the sales price or the current appraised value. So when the appraisal is below the price, your maximum loan shrinks and the gap comes out of your pocket, or your LTV rises.

Worked example: the appraisal gap

You agree to buy a condo for $800,000 and plan to put 20% down with an 80% LTV loan. The appraisal comes in at $760,000.

Notice the extra cash ($32,000) is less than the $40,000 gap, because you still borrow 80% of the lower value. If you keep the larger loan, your LTV goes above 80%, which on a conventional loan usually means private mortgage insurance (see the PMI calculator) and can change the rate you are offered. In a co-op, the board's own financing limits may also stop you from borrowing more.

Your options when the appraisal comes in low

1. 1

   Read the appraisal

   You are entitled to a copy. Check the square footage, bedroom count, condition rating and the comparables used. Factual errors are the easiest thing to fix.
2. 2

   Ask for a reconsideration of value (ROV)

   If there are errors or better comparables, ask your lender to submit an ROV. On Fannie Mae loans you get one borrower-initiated ROV per appraisal and can include up to five alternative comparable sales.
3. 3

   Renegotiate the price

   Share the appraisal with the seller through your broker or attorney. A seller who would face the same appraisal with the next buyer may agree to lower the price or split the difference.
4. 4

   Cover the gap in cash

   If you still want the home at the contract price, bring the extra cash. Recalculate your reserves first, since co-op boards and lenders look at what you have left after closing.
5. 5

   Check your contract

   Your rights depend on your contract. Some contracts include an appraisal contingency; others only a mortgage contingency tied to getting a loan commitment. Ask your attorney before any deadline passes.

How to make a reconsideration of value count

Fannie Mae requires lenders to give you a disclosure explaining their ROV process with the appraisal report. A strong request:

• Points to specific factual errors (wrong size, missed renovation, wrong floor).
• Offers closed sales that are closer, more recent or more similar than the ones used, with addresses and dates.
• Explains why each new comparable is better, in a sentence or two.
• Does not argue that the value should match the contract price. Price alone is not evidence of value.

The lender reviews the request first, then decides whether to send it to the appraiser. You cannot submit an ROV after closing, so move quickly.

Your right to a copy of the appraisal

1. Within 3 business days of application

   Notice of your right

   The lender must tell you in writing that you will get copies of appraisals and valuations.

2. Promptly on completion

   Copy of the appraisal

   The lender must send each appraisal and written valuation once it is done.

3. 3 business days before closing at the latest

   Deadline for copies

   Whichever comes first. You may agree in writing to get copies at or before closing instead; that waiver generally has to be given at least 3 business days before closing.

Regulation B says lenders cannot charge for the copies, though they can charge a reasonable fee for the appraisal itself. The rule covers loans secured by a first lien on a dwelling.