Let’s say that you are purchasing a new home, and all your mortgage conditions are met except your appraisal. If the appraisal comes in lower than you expected, it could cause issues within your current mortgage terms and conditions. This would be regardless of your qualifications or pre-approval status.

Having your appraisal come in lower than expected could result in you having to make up the amount within your down payment. If you're unable to increase your down payment, this drop could cause you to need mortgage insurance (if you fall below the 20% down payment requirement). 

What Happens If You Cannot Increase Your Down Payment?

If increasing your down payment is not an option, you may have to consider an insured mortgage with one of the mortgage insurers (CMHC, Genworth or Canada Guaranty). While this could secure a lower mortgage rate, it wouldn’t be a big enough difference to offset the cost of the insurance premium. This would result in a higher cost of overall borrowing.

Another issue that could arise is that the purchaser could require a 30-year amortization rate to qualify for the mortgage. When a longer amortization is required, a lower payment will be the result, which creates a higher qualifying amount. 

When an insured mortgage is needed, a 25-year amortization is the maximum amount allowed. This means if someone is unable to access additional funds to cover the down payment requirements; and are unable to qualify with a 25-year amortization, then they will not be able to complete on their purchase.

Challenging An Appraisal

When an appraisal comes in low, an option is to review it in detail and make sure it is accurate. On occasion errors can occur, or certain factors can be overlooked by the appraiser.  If after a thorough review an error is suspected; you can challenge the value with the appraiser to see if it is possible to make an appropriate adjustment. Usually, if there has been an error, the appraiser will issue a revised value to the appraisal report.

Ordering A Second Appraisal

Appraisals, simply put, are the opinion of the appraiser themselves. Mortgage professionals follow a formula in order to determine what you qualify for; appraisers also have a specific formula to determine a properties overall value. We would expect two appraisals to produce a similar value, but this isn’t going to be the case across the board. 

Once you attempt to challenge an appraisal, and the appraiser comes back with the same value, you can always order a second appraisal at your expense. While you are hoping for a higher value amount when ordering a second appraisal, you do run the risk of the second appraisal coming in lower than the first. The lender will almost always want to use the lower appraisal value. In the end you run the risk of paying for another appraisal and increasing the down payment amount. There is the option of pressing for the exception to use the higher of the two appraisals, but this is not something that is absolute. 

How Often Do Appraisals Come In Low?

It is safe to say that appraisals usually come in at the purchase price, which reflects current market conditions. If you find yourself in a hot market, it's less likely that your appraisal will come in low. If you find yourself in a declining market, appraisers may be a bit more careful when deciding the value and the chance of a low appraisal is higher.  Appraisers usually want to support the purchase price if it's reasonable. 

If you have any further questions surrounding this topic feel free to give us a call anytime.