What to Do If Your Home Appraisal Is Underwhelming

NEW YORK (MainStreet) -- It was only a few years ago that the appraisal was little more than a technicality on the path to obtaining a mortgage. Now it can be an immovable roadblock. So, what can a buyer and seller do to minimize chances a low appraisal will block a loan?

The trick, says HSH Associates, the mortgage data firm, is to make sure the appraisal is accurate – and to understand just what the lender wants to know.

When home prices are rising, appraisals aren’t much of an issue, because if trouble arises there’s a good chance the homeowner or lender will be able to sell the property for enough to cover the mortgage debt. Lax lending standards made the appraisal even less of an issue in the housing boom a few years ago.

Now standards are tight and lenders worry that another dip in home prices could weaken the home’s value as collateral. Foreclosures and other “distressed” sales make price forecasts nearly impossible.

To make matters worse, HSH says many lenders have taken to using appraisal management companies, which sometimes hire appraisers who don’t know local markets well enough. In a nervous environment, appraisers may prefer to err on the safe side, setting prices too low.

Sellers and buyers who want to play defense should start by understanding that the lender is not primarily concerned with the home’s sales price, HSH says. More important to them is to be sure the appraised value exceeds the loan amount, since that’s what the lender has at risk.

If the appraisal falls short, the buyer’s simplest option is to increase the down payment to reduce the loan amount below the appraised value.

Of course, the buyer can also use a low appraisal to try to renegotiate the sales price. Most sales contracts provide for canceling the deal if the buyer cannot get a mortgage of a specified amount, and sellers only hurt themselves by holding out for prices appraisers won’t support.

Buyer and seller should also do their own research by studying recent sales of comparable homes on sites like Zillow.com.

In addition, the seller also should alert the appraiser to factors like improvements that make the home more valuable than the comparable sales data suggests, HSH says, and sellers should be on hand during appraisals to answer questions.

The buyer, who typically pays for the appraisal, has the right to review the paperwork, and should do so. Make sure, for instance, that the comparable sales used by the appraiser to calculate values are really comparable. Good comps involve sales from recent months of similar homes nearby.

But even if all those criteria are met, a home might not really be comparable. A home on a noisy corner might be worth less than an identical home in a quieter spot a few doors down.

If all else fails, the buyer can request a second appraisal, HSH says, suggesting the buyer prod the lender to select an appraiser who specializes in the local market.