A property appraisal is among the first steps in the closing process.
In other words, things are moving along smoothly at this point and the buyer is very close to successfully purchasing a property.
However, if an appraiser comes back with a low property appraisal, it could completely halt the buying process. This doesn’t happen often but can leave buyers stranded by the lender with no other options.
Fortunately, there’s another option for purchasing—hard money loans.
Let’s dig into how appraisals work, what happens if they come back low, and how a hard money loan can help a buyer complete the purchase.
How does an appraisal work?
Appraisals are unbiased opinions of a home’s value, based on a full inspection of the property, recent sales data from similar properties, features of the home, and more.
An appraisal is performed by a qualified appraiser that is licensed and familiar with the property’s location, but has no ties to the transaction in any way.
Appraisers visit the property and complete a report. Based on the report’s findings, the mortgage process can continue, delay, or be canceled altogether.
The purpose is to make sure the property’s price is accurate, and that the lender isn’t going to lend more money than they need to.
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What’s included in an appraisal?
An appraisal’s results are based on a variety of factors, including:
- Market trends
- Sales of similar properties
- Home’s features, including square footage, functionality, and number of rooms
- Visual inspection to note needed repairs or poor conditions
The actual report will include maps of the neighborhood and nearby sales, photographs, market data, and other required records that helped the appraiser determine the value.
Though appraisals are often based off historic sales so in a fast growing market the appraiser may be basing their value off of old information.
More often than not, the property’s value matches the sales price. However, when it doesn’t, it can cause major issues for both the buyer and seller.
Why would an appraisal come back low?
A low appraisal can be a surprise to all parties involved, but will be tied back to the data collected by the appraiser.
Some of the factors that contribute to a lower-than-expected appraisal include the seller overpricing the property, the property was poorly maintained, or there were foreclosures in the neighborhood.
It can also be due to fluctuating market values.
Despite any number of reasons, a low property appraisal can throw off the sale temporarily or permanently.
How does a low property appraisal affect a purchase?
If a buyer agrees to purchase a property for $500,000, but the appraiser determines the property is valued at $475,000, this leaves a $25,000 gap.
A traditional lender will only use the appraised amount to determine how much they will finance. They use this amount to calculate the loan-to-value ratio (LTV), which stays within the loan’s specific limits.
To get the same mortgage and interest rate they had before the low appraisal, the buyer would have to increase their down payment.
When faced with a low appraisal, a buyer’s options are to negotiate with the seller to lower the asking price, pay the difference out-of-pocket, or pay for a second appraisal with another lender to get another opinion.
At this point, though, the lender is likely to deny the loan if it doesn’t match up with the level of risk they’re willing to take.
How a hard money loan can help buyers complete their purchase
If you’ve been working with traditional lenders such as banks up to this point, you already have experienced the numerous delays associated with the strict requirements of the mortgage process.
A low property appraisal can be yet another unfortunate delay in the process, particularly because it comes so close to closing.
In today’s housing market especially, competition is tough and deals must move as quickly and smoothly as possible. Whether you’re purchasing or building a home, a low appraisal shouldn’t stop you from completing the deal.
Hard money loans can help buyers complete their purchase simply and quickly. A hard money lender makes deals based on common sense and the overall merits of the deal, rather than strict lending requirements.
Marquee Funding Group is one of few hard money lenders that offer loans for consumers, or non-investors. They’re also one of the only groups to offer long-term loans such as 15- and 30-year.
Submit your loan scenario to Marquee Funding Group
If you applied for a mortgage with a traditional lending institution and received a low appraisal that derailed the process, we can help you.
Consumers often use a hard money loan to secure a property, then refinance for a lower rate.
If you haven’t applied for a loan yet but fear the low property appraisal, submit your loan scenario to our team for a no-nonsense approach to lending. We offer a unique solution for those in complicated scenarios that banks are unable to assist.
This includes self-employed borrowers, those with a short employment history, or those who have trouble verifying their income through the usual mortgage loan requirements.
Hard money loans can provide funding for a wide range of properties, including:
- Commercial and industrial loans
- Single-family and multi-family homes
- Owner-occupied consumer or business purpose
- Non-owner-occupied consumer or business purpose
- Construction ground up, fix-and-flip, or fix-and-occupy loans
- Land loans
- Purchase money, rate-and term-refinance, and cash-out refinance
We can provide funding in a matter of days, rather than weeks or months. We simply want to know your plan and your exit strategy, and can quickly make a decision based on your unique scenario.