Low Home Appraisals And Solutions For Home Buyers And Sellers

In This Article, We Will Discuss And Cover Low Home Appraisals And Solutions For Home Buyers And Sellers
There are cases where home buyers will get low home appraisals. This is common during times when housing inventory is low and a hot housing market. Home prices have been skyrocketing for the past seven years due to the demand for housing. There is more demand for housing than there is inventory. The coronavirus pandemic did not slow down the housing market. Homes selling higher than the list price is the norm in most parts of the country. Just because buyers get low home appraisals does not mean the deal is dead. Many times buyers and sellers work out a solution to restructure the deal when there are low home appraisals. However, both parties need to have an open mind and work together. We will discuss cases where buyers get low home appraisals and potential solutions on this blog.

Reasons For Low Home Appraisals

What are the causes of low home valuations

There should be no reason for low home appraisals. Home sellers rely on their listing real estate agents when listing their homes. Real estate agents are professionals who will look at comparable sales and help sellers price their homes right. Listing homes at higher than market value is one of the main reasons for low home appraisals. The housing market has been booming in the past several years in most parts of the country. It has been a sellers’ market. There are more buyers than available homes. In many cases, there are multiple offers on homes that are under $342,000. Sellers often raise their listing price due to the hot housing market. Multiple offers and bidding wars are some of the main reasons for low home appraisals. The bidding war, strong competition, low housing inventory, and sudden home appreciation is creating an artificial housing market.

Importance Of Home Appraisals 

Lenders rely on the home appraisal to secure their collateral. Home appraisals are the result of solid data. It has nothing to do with trends and/or shits in the housing market. Low home appraisals normally are common when the appraiser does not find enough closed homes in the area of the subject property. There are instances where there is a low home appraisal where the appraiser has not searched enough comparable sales. if this is the case, the lender can request an appraisal rebuttal. Appraisal rebuttals are normally not successful unless there are enough comparable sales that are similar to the subject property within a half to a mile radius. Maybe there are recent comparable sales of homes in the area since the appraisal was done at the subject property.

According to Orland Park, an Illinois-based realtor Karry Razik of Remax First Class, he says the following:

“There are cases where a home comes in at a value lower than it should because the appraiser has made a clerical error in their report causing the value to follow suite. It could be something as simple as the square footage of the home being off or the appraiser not giving appropriate value to a superior location that your home resides in. When a buyer is faced with a low appraisal, there’s an immediate decision that must be made.  The lender must base your loan amount on the LESSER of the Contract Price, or the Appraised Value. If you want to get an FHA loan, which requires 3.5% down payment – and your Sales Price is $200,000, the maximum loan you can apply for is $193000.  If you receive a low appraisal of $185,000 – then the maximum FHA Loan you can apply for is $178,525. You would need to find the cash to make up the difference. That’s a $14,475 difference!

Options For Home Buyers With Low Appraisals

What are the options for low valued home buyers

Homebuyers with low home appraisals can do the following:

  • Cancel the real estate purchase contract
  • Go back to the negotiation table and see if sellers will lower the purchase price
  • Buyers and sellers can meet in the middle
  • Do an appraisal rebuttal
  • See if the lender can order a second appraisal
  • Come up with extra funds to cover the deficit of the home appraisal and the purchase price
  • Forfeit sellers concessions and lower the purchase price

This is a time where an experienced real estate agent can do the negotiation and come up with a solution.

How Appraisals Affect Sellers Concessions

FHA, VA, USDA, Fannie Mae, Freddie Mac allows home sellers to give buyers sellers concessions for closing costs. FHA and USDA allow up to 6% seller concessions. VA allows 4% of sellers concessions. Fannie Mae and Freddie Mac allow 3% sellers concessions on owner-occupant homes on conventional loans. 2% on investment properties. NON-QM Loans and Bank Statement Loans allow up to 6% in sellers concessions.

Here is how sellers concessions can be the cause of low home appraisals:

  • Let’s say a home seller wants a net of $100,000 for their home
  • Seller is willing to jack up the sales price to $106,000 and give buyers $6,000 in sellers concessions for their closing costs
  • This way, sellers can offer buyers $6,000 and will still net $100,000
  • Appraiser values the property at $103,000 and not $106,000
  • The seller either needs to lower the sales price and/or reduce the seller’s concession from $6,000 to $3,000

Cases like the above are very common in a rising hot housing market. Borrowers who need to qualify for a mortgage with a mortgage company licensed in multiple states with no lender overlays on government and conventional loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] Gustan Cho Associates are also experts in originating and funding non-QM loans. We have dozens of lending partnerships with wholesale non-QM lenders. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

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