Dear Friends, Colleagues & Clients,

Understanding how a home appraisal influences the selling price and mortgage amount is essential for anyone in the real estate market. Whether you’re buying, selling, or refinancing a home, appraisals play a crucial role in determining the property’s fair market value, directly impacting the loan amount you can secure.

What is a Home Appraisal?

A home appraisal estimates a property’s market value, determined by a licensed appraiser. This estimate is based on location, the home’s condition, recent comparable sales in the area, and any improvements or special features. Lenders use the appraised value to determine how much they are willing to lend you, ensuring that the loan amount reflects the home’s actual value.

How an Appraisal Affects Your Mortgage Loan

The mortgage loan amount is typically based on the home’s appraised value. If the appraisal comes in lower than the agreed-upon purchase price, the lender will adjust the loan amount accordingly, leaving you to make up the difference. On the other hand, if the appraisal matches or exceeds the purchase price, the loan-to-value (LTV) ratio can work in your favor.

For example, if you buy a home for $150,000 and make a $20,000 down payment, the LTV ratio is calculated by subtracting the down payment from the purchase price, resulting in a loan amount of $130,000. By dividing $130,000 by $150,000, the LTV ratio comes out to 87%.

When the Appraisal is Lower than the Purchase Price

A low appraisal can concern buyers, but it doesn’t necessarily mean the deal is off. Lenders will only approve loans based on the appraised value, not the purchase price. If the home you want to buy is appraised at $100,000, but the agreed-upon price is $150,000, you have a few options:

  1. Renegotiate the sales price with the seller.
  2. Cover the difference between the loan amount and the purchase price.
  3. Walk away from the deal if your contract has an appraisal contingency clause.

When the Appraisal is Higher than the Purchase Price

This is good news for buyers if the appraisal exceeds the purchase price. It means you’re buying the home for less than its market value, which could give you instant equity. However, the loan amount remains based on the agreed purchase price, not the higher appraisal.

No, an Appraisal Is Not a Legal Means to Set a Sale Price

It’s important to note that an appraisal is not a legal tool to force a seller to sell at a specific price. The appraised value of a property is a professional estimate of its worth, but it may not reflect the actual market value or selling price. The seller decides what price to sell their home for, and the buyers determine the fair market value.

Final Thoughts

Understanding the relationship between home appraisals and loan amounts helps buyers and sellers navigate the complexities of the home-buying process. For buyers, getting an appraisal is an essential step in securing the right mortgage and ensuring they’re not overpaying for a property. For sellers, knowing the importance of an appraisal can aid in setting realistic expectations during the sales process.

Stay informed, work closely with your real estate agent, and make sure your contract includes an appraisal contingency to protect yourself if the appraisal comes in lower than expected.