What Happens After An FHA Appraisal?
For the following sections, let’s take a look at the process through the eyes of a potential home owner named Casey. Every situation is different, but depending on the volume of work being handled by the appraisal management company, the difficulty of doing the appraisal and finding comparable properties, Casey should expect to have the appraisal report back within a few business days.
This section will go over the various scenarios that can come up during the home buying or refinancing process.
The Home Sale Appraisal Comes Back Low
For our first scenario, let’s assume you offered $380,000, had the offer accepted and the appraisal comes back at $360,000. Because the bank won’t approve a loan for more than the home is worth, there are two options:
Lower The Sales Price Or Renegotiate
If the seller is amenable, they might lower the price to what it appraises for, particularly if they’re motivated to move on. Otherwise, you can renegotiate. If you do this, you have to bring whatever the difference is between the appraised value and the final purchase price to the closing table in addition to your down payment and other closing costs.
You might be able to avoid the back-and-forth haggling by putting a clause in your purchase agreement that says you’ll pay a specific amount above the appraised value up to a certain dollar figure.
Walk Away From The Home
If the seller is unwilling to budge on the price or you can’t come to an agreement, you may be left with no choice but to walk away. If that happens, you’ll need to make sure that you have an appraisal contingency in your purchase agreement.
The appraisal contingency gives you the power to renegotiate and walk away if the appraisal comes back low. If you don’t have this contingency, you could lose your earnest money deposit. An earnest money deposit is an amount of money put in escrow representing a promise that you’re taking the final steps to secure financing to buy the property. In order to retain your deposit when you walk away, you must be moving on due to a contingency defined in the agreement.
The Refinance Appraisal Comes Back Low
Now let’s say you own the home but are currently trying to refinance the existing mortgage. In this scenario, a low appraisal can have other implications.
If you’re refinancing your home, and the value comes in lower than what was estimated at the beginning of your loan process, you have a couple options. First, you can look at restructuring your loan. If you were planning on taking cash out and estimated your home’s value to be $200,000 and the value assigned by your appraisal was $175,000, that reduces your maximum loan amount from $160,000 to $140,000. This may mean taking less cash out, consolidating less debt or even bringing some funds to the closing table to make up the difference if the loan still provides a benefit.
If after reviewing the available options with your lender the loan is no longer a benefit to you, your loan will be denied and the loan process will end.
The Appraiser Requests Further Repairs
Now, let’s take a scenario in which you’ve fallen in love with a home, but it needs some electrical work done in order to be brought up to code and the appraiser is requiring the repairs be completed for the transaction to close. Ideally, you can negotiate to have the seller pay for the repairs. If that’s not feasible, a buyer is allowed to pay for the repairs as well.
When Should Repairs Be Completed?
In general, repairs that are about the safety and livability of the property will have to be completed before the transaction closes. In certain cases, you can work with your mortgage lender to complete the process post-close via an escrow holdback.
In an escrow holdback, a portion of the loan funds are set aside to pay for repairs that can be completed later, but don’t impact safety. Examples include sod, gutters, deck, driveway and pest treatment.
The Appraisal Comes Back At Or Higher Than The Expected Amount
If the appraisal comes back at least as high as you agreed to pay in your purchase agreement or how much you’re refinancing for, this is the best possible scenario. You just move forward with your transaction.
