It’s a nightmare scenario for most home buyers: you’re pre-approved for a mortgage, find the perfect house, have your offer accepted, and then, right at the end of the process, the appraisal comes in below your purchase price. Now what?
In the current unpredictable housing market, where bidding wars can drive up prices, this is unfortunately common. One of the reasons you need an experienced real estate attorney on your side is to handle these types of contingencies when they come up. Here’s what Indiana home buyers (and sellers) need to know.
If the appraisal comes in low, your financing may be in jeopardy
The immediate consequence of a house appraising below the purchase price is that the mortgage lender will only finance a loan based on the appraised value. After all, the bank doesn’t want to lend the buyer more money than they can potentially recover if they foreclose on the house. But the consequence for the buyer and the seller is that there’s now an “appraisal gap” – a difference between the purchase price and the amount of funds the buyer actually has available to pay for the house.
So, how do you deal with an appraisal gap? There are essentially five options:
- Drop the price: The seller agrees to lower the sale price to the point where the buyer’s financing allows the deal to go through.
- Cover the gap another way: The buyer pays cash to cover the difference between the mortgage and the purchase price. This may come out of the buyer’s savings, a gift or loan from a family member, or some other type of financing like a personal loan.
- Split the difference: Essentially, the parties land somewhere between the two options above. The seller agrees to lower the price somewhat, and the buyer comes up with enough cash to cover the remaining gap.
- Challenge the appraisal: It’s sometimes possible to get the house re-appraised for a higher value if there are better comparable sales available. This is risky, though. There’s also a chance the new appraisal will come in even lower, making the gap bigger.
- Walk away: If there’s no way to get the deal done, it can be canceled, though the buyer may lose their earnest money and other out-of-pocket costs.
Which option makes sense in any given situation depends on the circumstances. For example, if the seller is highly motivated to get the house sold – say they need to move as soon as possible – then it may be in their interest to lower the price instead of re-listing the house. The options available to you will also depend on the terms of the purchase and sale agreement, including any applicable contingencies.
How an experienced real estate lawyer can help
There are two main ways having a good real estate lawyer on your side can help to minimize the cost of an unexpectedly low appraisal. First, your lawyer can work proactively to ensure your interests are protected before the unexpected happens. One option is to include an appraisal contingency clause – essentially, a clause that lets the buyer get their earnest money back if the home appraises for less than the purchase price – in the purchase and sale agreement. There are numerous ways to construct such a contingency. Your lawyer can explain your options and ensure that your interests are protected.
Second, after the low appraisal, your attorney can negotiate with the other party’s attorney on your behalf to reach a mutually beneficial resolution. Sometimes, it’s possible to find a path forward that both parties are happy with. Other times, it makes sense to call it off and start over. Either way, the right attorney can ensure you are protected every step of the way.
Real estate attorney Janet Davis Hocker and her experienced team at Hocker Law, LLC have extensive experience navigating the many ways real estate deals can run into trouble. If you’re considering a real estate purchase or sale, give us a call or contact us online to find out how we can help.
“As a real estate investor, I have used Hocker Law for all my business needs. When I began investing, I would regularly ask Janet questions, and she would promptly reply with great insight. When I began building my portfolio, I entered a lawsuit and an eviction case, and Janet successfully helped me with both cases at the same time. Her paralegal, Emily, was also spectacular. She answered all my questions and kept me updated on both cases when she had news to share. I would highly recommend Hocker Law as they provide great service and ability to win lawsuits.” – Dylan V., ⭐⭐⭐⭐⭐