What Happens If Your Appraisal Comes In Low in Colorado?
Quick version: if your appraisal comes in below the contract price on a Colorado home, the deal isn't automatically over. Depending on your contract and your loan, you may be able to ask the seller to lower the price, ask the lender to reconsider the value, cover the difference yourself, or walk away if your contract allows it. The right move depends on your contract, your cash and how far apart the numbers are.
What a low appraisal actually means
An appraisal is an estimate of what the home is worth, prepared by a professional appraiser for your lender. Freddie Mac describes the appraiser as a third party with state-issued credentials who provides a report to the lender.
Freddie Mac notes that if the appraisal comes in lower than the purchase price, your lender will likely decrease the amount they'll allow you to borrow. That can leave a gap between the price you agreed to and what the loan will cover. How big that gap is, and what it means for your deal, depends on your loan and your lender, so ask them to walk you through it.
A low appraisal is a signal, not a verdict. It may mean the price is ahead of the market, or it may mean the report missed something. Your first job is to figure out which.
Start by getting a copy of the appraisal
If you've applied for a mortgage on the home, the Consumer Financial Protection Bureau says your lender is required to send you a copy of the appraisal. If you haven't received it, ask your lender for your appraisal copy right away.
Read it closely. Check the basics: square footage, bedroom and bathroom count, lot size, upgrades and condition. Then look at the comparable sales the appraiser used and ask whether they really match the home you're buying.
Your four main options
These are the paths the CFPB and Freddie Mac describe. You may end up using one, or a mix of them.
- Renegotiate the price. You can share the appraisal with the seller and ask them to lower the price to the appraised value, or to meet you partway.
- Ask for a reconsideration of value. If the report has errors or weak comparables, you can ask your lender to take another look.
- Cover the gap yourself. If the seller won't move, you could bring more of your own cash to help make up the difference.
- Walk away. If your contract gives you the right to cancel over the appraisal, you may be able to end the deal.
Leaving any of these off the table is a choice too, so it helps to weigh all four before you answer the seller.
Renegotiating with the seller
Freddie Mac suggests sharing the appraisal report with the seller to show the values of comparable homes in the area. A seller who sees the same evidence your lender sees may be more open to adjusting.
The seller doesn't have to agree. They may lower the price, split the difference, or hold firm. If you're working with a real estate agent, they can help with this back and forth.
Challenging the value: reconsideration of value
If you think the appraisal is wrong, you can ask your lender to reconsider it. The CFPB calls this a reconsideration of value, or ROV, and says borrowers can challenge inaccurate appraisals by pointing out errors or omissions, inadequate comparable properties, or evidence of prohibited bias.
Bring facts, not frustration. The CFPB's examples are specific: factual errors or omissions, comparable sales that don't fit, or evidence of bias. So point to the exact mistake or offer better comparable sales, with a short note on why they fit.
Ask your lender how their process works and how long it may take. The value may change, or it may not.
Covering the gap with your own cash
If the seller won't lower the price, Freddie Mac notes that putting more money toward the purchase is another option. You may need to bring more cash to closing than you planned. How much depends on your loan, so your lender can tell you.
This can keep a home you love, but it has tradeoffs. That cash isn't available for reserves, moving costs or repairs. And you're paying more than the lender's appraiser thinks the home is worth today.
If your savings are already spoken for, this option may not be realistic, and that's okay. Knowing that ahead of time helps you negotiate with a clear head.
Walking away and protecting your earnest money
Sometimes the best answer is to let the home go. The CFPB notes that if the seller won't reduce the price, you may want to cancel the sale and consider talking with an attorney. Freddie Mac recommends that your contract include an appraisal contingency clause, which can allow you to cancel the contract.
Whether you can walk away cleanly depends on your contract. The CFPB notes that, depending on the terms of your purchase contract, there may be costs associated with cancelling the sale. Check your contract with your real estate agent, if you have one, or an attorney before you decide, so you know what applies to you and your earnest money.
Talk to your lender before you decide
A low appraisal changes the math, and your lender can walk you through what each option means for your loan. That might include how a lower price, a revised value or extra cash affects what you'd bring to closing.
If you're still early in the process, it helps to know what comes after the appraisal too. This walkthrough of what happens after you apply for a mortgage in Colorado covers the steps in order, and the Colorado homebuyers guide explains the bigger picture.
Diane also helps buyers in Arizona, Montana and Florida.
Your next step
An appraisal surprise is stressful, especially with a closing date on the calendar. You don't have to sort it out alone.
If you'd like to talk through your options before you answer the seller, schedule a call with Diane. You can also reach her at 719-687-2112.
Diane Beaumont, Mortgage Loan Originator, NMLS #247026. Benchmark Mortgage, a dba of Ark-La-Tex Financial Services, LLC, NMLS #2143. Equal Housing Lender. Not a commitment to lend.