Few life events are more exciting than purchasing your first home. Depending on where you choose to buy, your real estate investment may also allow you to realize a hefty profit when you sell. Of course, before you can close on your new house, you typically must go through the appraisal process.
An appraisal simply determines the market value of the property you want to purchase. To estimate the property’s value, appraisers consider the home’s location and condition. They also look at recent sales of comparable homes. If the house you want to buy appraises for lower than its asking price, you may wonder how the low appraisal affects closing.
The loan-to-value ratio
Your mortgage lender has a keen interest in the appraisal. After all, the lender probably does not want to loan you more than the house is worth. Still, even with a low appraisal, you may be able to secure financing.
The loan-to-value ratio, which is part of the purchase agreement, is a major component of the lender’s decision. If the ratio is too high, you may have to put up more of your own money to move forward with the purchase. That is, the lender may only extend a mortgage for the appraisal price, leaving you to make up the difference.
Buyer and seller negotiations
While sellers can take steps to increase the appraisal value of their homes, a low appraisal gives you a negotiation tool. If the seller’s home appraises for less than the asking price, the seller may be willing to accept a lower offer or make other concessions.
You should not panic if your dream home appraises for less than its asking price. Ultimately, though, when shopping for a new house, you may want to have a contingency plan for dealing with the possibility of a low appraisal.