What happens if my appraisal comes in low?

What happens if my appraisal comes in low?

In a declining real estate market like the one we are having, it can be a serious problem when securing a mortgage if the appraised value comes in lower than expected.

At the moment we are working with two different clients where this has or may become an issue.

The first client had a mortgage that matures at the end of next month. Her current lender would not renew the mortgage due to undisclosed reasons (probably due to lack of sufficient income). We did all of our due diligence while in advance and asked the client all of the right questions about income, debts, credit etc. and found a new lender that was more flexible about income and had reasonable mortgage rates. We received a conditional commitment (all mortgage commitments are conditional on satisfying all of their requirements. But there was one condition we could not control: the appraisal value. 

The client was confident that her home was worth at least $575,000. However, when the appraisal came in it was appraised at only $510,000. This became a big problem as this more flexible lender would only lend up to 65% of the appraised value of the home. The client would need to come up with the difference from her own savings which was about $45,000. Clearly this was not possible, leaving the client with three or four main options:

1. Get the missing $45,000 by selling something, from savings, from immediate family members as a gift, or a combination thereof. This was not possible.

2. Try another appraiser. This would have also been very risky as another appraiser might come in at the same value or even less in which case it would have been a waste of time and money.

3. Find a new lender. This is what we have done. The cost of borrowing was higher, but at least the client could stay in her home. We also said the payments to interest only so that the payments would be affordable.

4. Sell the home. This was also not an ideal option because this is not the best time to sell a home and because the client and her family would need to go and rent for probably more than the mortgage payments.

Our second clients situation was not as urgent but they were still trying to avoid any precarious situation. What they were trying to do was purchase a home first and then sell theirs. We explained to the clients that if their home did not sell for the price they were expecting or if it took too long, it would start to get very expensive to bridge both homes. I gave them many different options to mitigate this risk, and they decided to go With my recommendation to get a secured line of credit on their current home that they could access if needed for an indefinite period of time and make the minimum payments. This would allow them to leverage their current home against the purchase of the other home and make up the difference with a private loan. This would reduce the cost of the private loan. The idea is that if their home took too long to sell, they would close on the purchase by maximizing their HELOC, and make up the difference with their savings in combination with a private lender. Why a private lender? Because no bank will do a bridge loan unless you have a firm offer of sale AND purchase. Otherwise, the bank doesn’t know if it will take 1 month or 12 months to sell. 

How does this relate to a low appraisal? We need to rush to put the HELOC in place while they’re home it’s still at a higher value because the amount of the HELOC will depend on the appraised value of the home. Similarly, when getting a mortgage on the purchase, if the lender requires an appraisal on that home, it could also fall in the meantime after the purchase offer has firmed up. Therefore, in these days of a declining market, it is extremely important to get an appraisal as quickly after the offer is excepted as possible!