When you apply for a mortgage to purchase a house, your lender will examine your income, assets, debt-to-income ratio, and work history to determine whether you are qualified. The lender will also need to request a home appraisal on the property you wish to purchase to ensure that it isn’t worth less than desired the loan amount to buy it, and that it satisfies property requirements outlined by certain government loan programs. Sometimes a home appraisal can come back with property issues that need to be addressed before the lender can approve your mortgage application. Let’s get into the details about home appraisals and what you can do in the case your appraisal is less than ideal.
What is an appraisal?
During the appraisal, a licensed, experienced appraiser will evaluate a property by going onsite and assessing where the home is located, the condition of the home, any special amenities, and compare the home to other properties in the area. Remote or hybrid appraisals are also an option where the appraiser does not go onsite but will evaluate the property using available data. Once an appraisal inspection is complete, they will send the appraisal report to both yourself and your lender.
If the appraisal comes in at or above the purchase price of the home, and there aren’t any other outstanding issues with your loan application, your loan will move forward in the process to be finalized. However, a low appraisal can be a huge roadblock for your loan approval, as the appraisal is one of the factors that your lender uses to determine how risky it is to lend you money.
What property issues could I encounter with my appraisal?
There are several reasons why an appraisal could present a roadblock to your loan approval. Some of the most common appraisal problems include:
- Property value: a property that is estimated to be worth less than the loan value will be problematic for your lender.
- Property location: Some loan programs (like a USDA loan) require a property be located in a certain area. An appraisal that shows the property is located outside of a given boundary result in disqualification for the loan.
- The condition of the home: If the home is in need of repairs, has been poorly maintained, or is in a state of disrepair, this will negatively affect the appraisal value.
- Comparable properties: An appraisal is based on comparisons to other properties in the area, and if the comparable properties have a lower appraisal value than your home, this would be a red flag to your lender.
While it is never a good thing to receive an appraisal that outlines property issues, there are some steps you can take that could help save your mortgage approval.
My appraisal came back with property issues, what now?
If the appraisal comes back with property issues, there are a few things that you and your lender can do:
- In the case that your appraisal came back too low, you can renegotiate the purchase price of the home, put more money down to decrease your loan amount, or request a second opinion in the form of a new appraisal.
- If the appraisal outlines significant problems with the condition of the property that prevents your lender from approving your loan, you can work with the seller to have them make repair the issues in question.
- If the location of the property is an issue and you’re not willing to find a new property, you may need to explore other loan options that will allow you to finance a home in the given area.
- If none of the above actions can be taken to remedy property issues, your only other course of action would be to cancel the purchase contract and find a different property altogether.
If you and your real estate agent decide to renegotiate the purchase price of the home, it’s important that you come to an agreement on a new price that both parties are happy with. If the seller is unwilling to lower the price, you may want to consider asking for a second appraisal. This is where another appraiser will evaluate the property to see if the first appraiser missed aspects of the property that would increase the value of the home.
If the seller is unwilling to make any repairs or if you find a different property, you may choose to cancel the purchase contract. This can be a difficult decision, but it’s important to remember that there are other homes out there and an appraisal that indicates significant property issues could be a forewarning for additional issues in the future if you were to move forward with the home purchase.
While buying a home can come with its twists and turns, there’s nothing like moving into your dream home! If you’re ready to being the home financing process, you can get started now!
