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.
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:
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;
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.
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