I know that a house being under-appraised can really screw things up trying to close on a home, but why/how so?
In: Economics
When you are taking out a mortgage, that mortgage is secured by the house. If you stop paying it back, the bank gets to seize the house, sell it, and use the proceeds to pay themselves back.
As a condition of this agreement, the bank wants to know that if there were indeed to seize and sell the house, they would get back something like the amount they loaned out to you. The appraisal gives them an independent assurance that the house is worth at least as much as the mortgage.
If you’re trying to buy a house without a mortgage, none of this matters, though you may still want to know if the appraisal is well below a price you’re considering and the reason for the disconnect. If you do need a mortgage, you have two options in the event of a low appraisal. First, you can make up the difference in the down payment. The bank only cares about the money they loan to you, so if you reduce the size of the loan by paying more in cash, that’s fine. Second, you can back out of the sale. Depending on the details of the sale contract, this may leave you liable to, essentially, pay the seller some money for wasting their time (often about 1% of the asking price). You can add a standard clause to the contract that avoids this payment in the event that financing falls through, though all else equal, sellers will prefer to do business with a buyer who waives that clause.
Latest Answers