When there's a discrepancy between the appraisal value and the loan amount, it can pose significant challenges in a real estate transaction. This situation often arises when the property appraises for less than the proposed purchase price or the property basis you seek (on a refinance).

Appraisers really hate being second-guessed, so if you are going to dispute an appraisal, you had better be armed with facts to support your position. Contrary to popular opinion, listing prices in the area do not help you to fight a low appraised value. You will need to provide local comps from recent, actual sales to justify your position.

Here’s a step-by-step guide on how to address this issue:

Understand the Discrepancy

Review the Appraisal Report:

• Detailed Examination: Carefully examine the appraisal report to understand the appraiser’s valuation rationale, including comparable sales, property condition, and market trends.
• Identify Errors: Look for any potential errors or omissions in the report, such as incorrect property data or inappropriate comparables (comps).

Consult with Your Lender:

• Clarify Issues: Discuss the discrepancy with your lender to understand how the appraised value impacts your loan application.
• Explore Options: Enquire about possible solutions or adjustments that can be made.

Challenge or Reconsider the Appraisal

Request a Reappraisal:

• Submit a Request: If you believe the appraisal was inaccurate, you can request a reappraisal. This may involve paying for a new appraisal, which is often necessary if you have substantial evidence of error or new information.

Provide Supporting Evidence:

• Submit Comps: Provide the lender with additional comparable sales data or other relevant information that supports a higher property value.
• Correct Mistakes: Point out any factual errors or outdated information in the original appraisal report.

Second Opinion:

• Appraiser’s Expertise: Consider getting a second opinion from another qualified appraiser. This can be particularly useful if you suspect the original appraiser’s methodology was flawed.

Negotiate the Loan Terms

Adjust Loan Amount:

• Reduce Loan Amount: If the appraisal value is lower than expected, you may need to adjust the loan amount to match the appraisal or be prepared to cover the difference with a larger down payment.

Recalculate Loan-to-Value Ratio (LTV):

• Impact on Terms: Understand how the lower appraisal affects your LTV ratio, which might impact your loan terms, including interest rates and private mortgage insurance (PMI) requirements.

Increase Your Down Payment

Cover the Difference:

• Additional Funds: Increase your down payment to cover the gap between the appraisal value and the loan amount. This can help you secure the loan while aligning with the appraised value.

Financial Impact:

• Assess Affordability: Ensure you have the additional funds available and assess how increasing the down payment impacts your financial situation.

Renegotiate the Purchase Price

Discuss with Seller:

• Price Adjustment: Negotiate with the seller to lower the purchase price to match the appraisal value. Sellers may be willing to adjust the price if they are motivated to close the deal.

Contingency Clauses:

• Contractual Terms: Review your purchase agreement for any appraisal contingency clauses that allow you to renegotiate or withdraw from the contract based on the appraisal result.

Explore Alternative Financing Options

Seek Alternative Lenders:

• Different Lenders: Explore options with other lenders who might have different appraisal practices or who may be more flexible with the loan amount based on the appraisal.

Consider Alternative Loan Products:

• Loan Options: Investigate different types of loans or financing solutions that might be more accommodating to the appraisal value, such as certain types of portfolio loans.

Evaluate Your Purchase Decision

Reassess Property Value:

• Property Worth: Consider whether the property is worth the investment at the appraised value. If the discrepancy is significant, you might need to reconsider the purchase.

Future Investment Potential:

• Market Trends: Evaluate the long-term potential of the property and its investment value. Sometimes, a lower appraisal might reflect short-term market conditions that could improve over time.

Legal and Professional Advice

Consult Professionals:

• Legal Counsel: Seek advice from a real estate attorney if you encounter issues with contract terms or if negotiations become complex.
• Financial Advisor: Consult a financial advisor to understand the implications of adjusting the loan amount or increasing your down payment.

Real Estate Agent:

• Agent Support: Work with your real estate agent to navigate negotiations and explore options to address the appraisal discrepancy effectively.

Conclusion

Handling a discrepancy between the appraisal value and the loan amount involves a combination of understanding the appraisal, negotiating terms, and possibly adjusting your financial strategy. By thoroughly reviewing the appraisal, negotiating with all parties involved, and considering alternative options, you can address the issue and move forward with your real estate transaction. Consulting with professionals and being flexible in your approach can help you find a resolution that aligns with your financial goals and investment strategy.