In some areas, comparable sales used to calculate an appraisal may be based on older sales, foreclosures or short sales that don’t represent rapidly rising home values. If you make an offer on a home that requires your mortgage amount to be higher than the home’s appraised value, your lender won’t be able to approve your loan. Now that’s a huge glitch!

What are options to deal with a low appraisal?

Buyers: Don’t Get Too Excited

As a buyer, you might assume the seller will renegotiate the contract if the appraisal comes in lower than the price you offered. But not all sellers will be willing to lower their price. If that’s the case, you still have options:

  1. Cancel the contract. Nearly all sale contracts include a contingency that allows the buyer or seller to cancel the contract in the case of a low appraisal.
  2. Challenge the appraisal. Buyers normally pay for the appraisal, and that gives you the right to review it. If you find factual errors in the number of square feet, for example, you may be able to get the appraisal changed.
  3. Request a new appraisal. If pointing out errors in the appraisal doesn’t get results, you or the seller can request a new appraisal.

One other option is to pay the difference out of your pocket, but be careful with this one. If you’re following Dave’s recommendations and are putting down 20% on this home, but the appraisal still comes in too low to meet your mortgage amount, plunking down even more cash is a big risk. You’d have to be sure that you will stay in the home long enough for its value to recover.

Sellers: Avoid Trouble Altogether

As you can see, a low appraisal will be hardest on the current homeowner. You can try to avoid the problem with these suggestions:

  1. Listen to experience. A real estate agent with expertise in your neighborhood will help you set a reasonable price for your home and will know how to handle a low appraisal if necessary.
  2. Document improvements . If you’ve recently made improvements to your home, provide details. This is especially helpful for behind-the-scenes improvements like updated electrical systems or high-efficiency heating and cooling units.
  3. Keep it clean. Evidence of a well-maintained home such as a trimmed yard, clean windows and clutter-free interior can make a good impression on an appraiser as well as potential home buyers. 

Dave Ramsey 5/14/2013