What happens if my home appraises low?

When Refinancing My Home

Well, if you’re refinancing your home, you can only get a mortgage up to 80% of the value of the home. So if your home appraises lower than expected, the amount you will be able to borrow will be 80% of that.

Example: let’s say you have a $250K mortgage and you would like to borrow an additional $250K (for a new mortgage total of $500K). You believe your home is worth $625K. The bank asks for an appraisal and the appraiser concludes that your home is actually worth $600K. You will only be able to get $480K total (80% of $600K), not the expected $500K. So you will only receive an additional $230K from the refinance, not the expected $250K. This may not being a big deal to you, but what if you are buying a home that appraises low??

When Purchasing A Home

In the current real estate market, almost everything is selling for over the list price. Many listing agents are deliberately setting the list price under what they expect. This can be dangerous for financing purposes. The reason is that often banks will question the price that you offered if it is $100K or $200K over asking.

For example, in our area of Hamilton, it is not uncommon for a home listed at $500K to sell for upwards of $700K! If the bank or insurer (CMHC) questions if this is a realistic value, they will order an appraisal. If the appraiser concludes that the value is less than what you offered, it COULD be problematic which is why we always recommend making any offer conditional on financing.

Here is what can happen:

1. If you intended to put the minimum down payment (5% on the first $500K and 10% on the remainder), you will need to make up the difference and come up with more.

For example, let’s say you have offered $700K and you have a minimum down payment of $45K. The bank intends to lend you $655K. The appraiser comes in with a value of $650K. Now the bank will only lend you $605K based on the new value. That means you will need to come up with the difference of $50K for a total down payment of $95K!

2. If you planned in putting 20% down, you may be pushed into a high ratio situation, meaning that CMHC becomes involved and you pay the government insurance premium.

For example, let’s say you are putting $140K down on that $700K home. You intend to borrow $560K from the bank. Now the home is appraised at $650K. You still need $560K from the bank, but $560K is 86% of 650K. That means that now you are only putting 14% down! This means that you will now need to pay the CMHC insurance premium (which will be added to the mortgage) AND you will need to pass the stress test.

3. If you planned on putting more than 20% down, you may be ok.

For example, let’s say you are putting $200K down on the $700K home. That means you need to borrow $500K from the bank. If it appraises low at $650K, the $500K that you are borrowing represents ~77% of the value. Since it is less than 80%, you are ok; CMHC does not get involved.

Conclusion:

If you are putting enough down on the home, a low appraisal may not affect you. However, if you are putting too little, it may cost you OR you may be forced to walk away.