Thinking of buying a home? Why not start by getting your mortgage pre-approved? It takes the uncertainty out of buying a house. At the end of the process you’ll know how much you can spend and what your repayments will look like. Likewise, if you plan to get the house inspected, have the appraisal done before you make the offer. This will help you to avoid problems later.
An appraisal is an unbiased valuation of a property by a trained third party. So, what if your mortgage appraisal comes in too low?
Mortgage lenders will always assess the value of the home that serves as collateral against the loan that you make. Sometimes they will send an appraiser to the property. At others, they may depend on the Automated Valuation Method. The purpose of the appraisal is to protect their investment. The appraisal gives the lender assurance that the market value of the property covers the size of the loan.
The appraiser’s job is to look at the layout of your property and assess its condition. After he has checked all the relevant amenities and the property infrastructure the appraiser will check the value of other similar houses sold in the area in the last twelve months. A diligent appraiser will also look at recent trends in the property market in the area. All appraisers are qualified licensed and regulated.
In property markets such as those found in Toronto and Vancouver where values have spiked over recent years, it is not unusual for the appraisal to come in lower than the offer that has been made for the property. This happens far too frequently in sellers’ markets where property owners may receive multiple offers for their properties.
Steps in the Bank Appraisal for Mortgage Canada
- Once the lender has requested an appraisal the appraiser will make an appointment with the home owner.
- The appraiser will inspect the home, taking pictures and asking various questions about renovations, amenities, age of the property etc. He will look out for any issues that could affect the future value of the home. These include roof and plumbing problems and places in the surrounding property that could deteriorate under certain weather conditions.
- He will compile an extensive report for the lender detailing the value and how he appraised it.
Problems with Appraisals
Appraisal problems are far more frequent than one would expect. In fact, the January 2019 REALTORS industry survey reports that 44% of buyers and sellers have experienced problems with appraisals.
There are many reasons why a home appraisal may come in low. Here are just some of them:
- The price of property may be artificially inflated due to the receipt of multiple offers to purchase.
- There may have been a spate of foreclosures or short sales in the area.
- The appraiser may not have properly examined the pending sales figures in the area.
- The appraiser may not have experience in the area where the appraisal is carried out. This problem has become less frequent in recent years because appraisals are subject to internal review.
- The appraiser may not have taken adequate account of rising market prices.
- Declining market values due to an excess of inventory and a shortfall of buyers. In a sluggish the market the appraiser may not have enough comparable quotes to gauge the property value properly.
- Seller over pricing.
- Appraiser error.
- The buyer gives cash back to the buyer, so the lender is of the impression that the property is over-priced.
What If Your Mortgage Appraisal Comes in Low?
Buyers who receive a low bank appraisal for mortgage Canada may feel that they have been ripped off. Many may want to pull out of the deal. Sellers on the other hand are always concerned that their properties may be undervalued. They may worry that they will receive what is justly theirs for the sale of the property.
If your offer to purchase carries a condition on finance, you can’t just walk away. What you can do is try to renegotiate the price, bringing it closer to the appraisal value. If the seller accepts that the property is overpriced, they may reduce the price. If the buyer walks away from the deal the seller may have to put the house back on the market. Another appraiser may also appraise the house at a lower value, so the seller would not have gained anything.
As a result of the low appraisal it is likely that the lender will reduce the size of the mortgage that they are prepared to offer you. All lenders are concerned about the loan to value ratio so they may reduce the mortgage to maintain the appropriate ratio. So here are your options;
- If you can increase your down payment, you could still buy the property.
- The seller could dispute the appraisal, or he could ask for a second appraisal. Ask the lender for dispute proceedings as only he can demand another appraisal. You may have to split the cost of the second appraisal.
- The seller should look for mistakes on the appraisal. Make sure that the size of the house and surrounding grounds is correct. Ensure that the appraiser has taken account of such items as energy efficient lighting, or special features that make your property stand out.
- Obtain a list of recent comparable property sales from your agent. Once you have the list you can give it to the underwriter to request a reappraisal. The comparable properties should be as close to the appraised house as possible.
- Get your agents to find out what the houses were actually sold for. They don’t have to disclose the information, but many will, since they may need similar information themselves in the future.
- Try to negotiate a compromise. Perhaps the seller will be willing to split the difference between the offer price and the appraised value.
Getting It Right from the Start
It is not a good idea to pay more for a property than its appraised value as you will end up with property negative equity from the outset.
If your purchase contract has been properly worded, you may be able to cancel the contract and look for another more suitable house. If your contingency is correctly worded, you can cancel the contract and the seller would have to release your deposit. Therefore, it is vital that you consider all eventualities when drawing up your offer to purchase.