A Low Appraisal Example

Listed for $395k

Offered $410k

$41k down and $369k loan

What exactly changes if the appraisal was, say, $400k?

Does my monthly payment change? I’d still have $41k to cover a $369k loan. Would it just be that my house was overpaid for?

What’s this “pay the difference” I read about and low appraisals?

With $41k down on a $410k purchase price, you are putting 10% down so the bank is covering the other 90% (loan-to-value or LTV). In this scenario, the bank is planning to cover 90% up to what it believes the house is actually worth. With a low appraisal at $400k, that would mean the bank believes the house is only worth that much. Thus, with a 90% LTV, the bank is only willing to lend 90% of $400k, for a loan amount of $360k. Obviously, the bank’s loan plus your original downpayment of $41k (sum: $401k) isn’t enough to cover the full purchase price at $410k.
 
That’s where the “pay the difference” part comes into play. You would need to be able to pay the difference of $9k (left over from $410k – $41k – $360k) to fulfill the original purchase price. This money would have to come in the form of additional downpayment from you. If you don’t have extra cash, say you really only have that $41k to put down, you can cover the difference with money from your original downpayment. However, this would leave you with less than 10% to put down. In that example, let’s say you set aside $10k to cover the difference between purchase price and appraisal price. That leaves you with $31k down, for the remaining $400k. Now your downpayment for the loan has been lowered to $31k / $400k or 7.75%, with the bank providing a loan of $369k to cover the remaining 92.25%.
 
As far as monthly costs, the $369k loan amount provided by the bank is the same as it was originally, except now it represents a larger LTV (92.25%). Because you have slipped under 10% down, you will probably have to pay more PMI. While this is not an ideal situation, it might be worth it if it means winning the house. I would recommend talking with your lender and realtor about the ramifications of a low appraisal.
 
All that said, there are also other solutions for a low appraisal! A good first step would be to request a “Reconsideration of Value,” which asks the appraiser to reconsider their calculated value. You and/or your agent will need to provide additional comps and reasons why the appraiser should increase the value. Alternatively, you can try negotiating with the seller: if the seller is willing to work with you, you can negotiate the purchase price down, partway or all the way to the appraisal value. Let’s say that the seller wasn’t willing to lower the purchase price all the way to the appraised value at $400k but they were willing to meet you halfway, at $405k. Now you’d only need to provide an extra $4k to cover the gap, instead of the full $9k we calculated above.
 
Failing that, you can start over with a new lender in the hopes that you will have better luck with a new appraiser. And as a last resort, if the seller is not willing to negotiate and you don’t want to contribute extra money or increase your LTV, your purchase contract usually contains a provision that will allow you to terminate the deal with no penalties. That means you would get your earnest money back. In my area this provision is contained within the financing contingency. Sometimes buyers decide to waive the appraisal protection to make their offers stronger, so make sure you talk to your realtor and understand the ramifications when you decide what offer strategy is best for you.