Mortgage lenders often require home appraisals before approving a loan to ensure the homes they’re financing are worth the prices being paid. Lenders rarely approve loan amounts higher than the appraised value.
During a strong seller’s market, there are more buyers than there are homes for sale, naturally leading to many homes selling for more than their asking price. This could result in the appraised value being less than the purchase price.
This leaves many buyers asking “Will I still get a mortgage if I buy above the appraised value?”
The short answer is yes. Many lenders take market conditions into account when making lending decisions, and in a strong seller’s market, they may approve loans for buyers whose offers surpass appraised values, but depending on the loan to value your mortgage terms may need to be adjusted.
Here’s an example of how this works:
- You make an offer of $225,000 on a home, and the seller accepts.
- The house is appraised for $215,000.
- Your original plan was to put 20% down, making your loan to value 80%. However, the loan to value is always based on the purchase price or appraised value, whichever one is less. Because of the appraised value, your loan to value is actually 83.7%. This leaves you a few options:
- You can pay the difference in cash.
- You can buy mortgage insurance. If you have a high credit score, single premium mortgage insurance could be a great option.
- You can request the seller to reduce the purchase price or possibly split the difference.
Another thing to consider
When you make an offer on a home, you can include an appraisal contingency in your offer. This means if the appraisal ends up being lower than your offer, you reserve the right to retract your agreement to buy the home and decide to drop the sale entirely. You may also choose to renegotiate your offer. Keep in mind, in a strong seller’s market, a home seller may favor offers that do not come with contingencies.
If you find yourself in a low appraisal situation, reach out to your lender and discuss all your options. They can often help provide a solution you’ll be happy with.