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During a refinance, there are many moments of anticipation you hope will eventually lead to successfully refinancing your home. Minutes feel like eons when you’re waiting for an update from your loan officer.
You’ll likely feel twinges of anxiety while you’re waiting for the results of your appraisal to come back.
Your most pressing question will likely be: What if the appraisal comes in low? A low appraisal could prevent you from refinancing your mortgage – but that doesn’t necessarily mean it’s time to throw in the towel.
If you’re determined to refinance, we can show you how to rebound from a low appraisal.
Why a Low Appraisal Matters
When you bought your house, your lender probably ordered a home appraisal to make sure that you wouldn’t pay too much and get stuck with a home you couldn’t afford.
A refinance appraisal does the same thing.
Once the home appraisal provides a home value, the lender uses it to generate a key number called the loan-to-value (LTV) ratio.
LTV = The amount you want to borrow (refinance) / The appraised value of your home
Lenders use the LTV to make sure you aren’t borrowing more than you can afford.
Let’s say you owe $200,000 on your mortgage balance, and you want to refinance. If your home is valued at $260,000, your LTV would be 77%.
But what if the appraised value is less than what you expected? What if it’s $250,000 (putting your LTV at 80%)? What if it’s $240,000 (putting your LTV at 83%)?
80% or lower is ideal because it means you have enough equity, and you won’t need mortgage insurance.
Here’s how your LTV could affect your ability to refinance:
- Lower than 80%: You should be able to avoid paying mortgage insurance.
- 80% or higher: You may be able to refinance, but you’ll pay mortgage insurance.
- 97% or higher: If the appraisal value is less than what you owe on the mortgage, your loan may be considered “underwater,” and the lender may not be willing to refinance.
How Do You Deal With a Low Appraisal When You’re Refinancing?
A low appraisal can torpedo a refinance. There are a few strategies you can try if your appraisal comes in low, including getting rid of mortgage insurance or opting for a cash-in refinance.
Pay mortgage insurance
If you were hoping to stop paying private mortgage insurance after your refinance, a low appraisal will probably not allow that dream to become a reality.
But if you manage to refinance to a lower interest rate, take advantage of your new, low rate and try to pay more toward the loan’s principal each month. Once you’ve reached at least 20% equity in your home, you can ask your lender to cancel the mortgage insurance.
If you’re close to 80% LTV, you can take advantage of a cash-in refinance. This is different from a cash-out refinance. With a cash-out refinance, you borrow against the value of your home. With a cash-in refinance, you make an upfront payment to get you over the 80% LTV hump. A cash-in refinance may cost more upfront in the short term, but it could save you big in mortgage insurance savings and interest expenses in the long run.
Look for a relief program
If your home’s low appraisal value means you can’t refinance with a conventional mortgage, you may still have options.
There are currently two programs available for homeowners who want to refinance but have high loan-to-value (LTV) ratios:
- Fannie Mae’s High LTV Refinance
- Freddie Mac’s Enhanced Relief Refinance®
To qualify, your mortgage must be a Fannie Mae or Freddie Mac mortgage. But don’t worry, most mortgages are.
The refinance programs are offered through traditional lenders, like banks and home loan lenders. To qualify, your home must have been:
- Bought within the last 3 – 4 years
- Financed or refinanced at least 15 months ago
See your refinancing options
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What Hurts a Home Appraisal
It’s perfectly normal to feel disappointed and frustrated if your appraisal comes in lower than expected. But before you call your lender or hit send on angry emails to the appraiser, take a moment. Ask yourself what legitimate reasons may have led to this unwanted outcome.
What sources did you use to calculate your original home value estimate?
Did you use professional pricing resources to get a realistic assessment of your home’s value? Home value estimates on real estate websites may not always reflect accurate data and may be inflated to drive traffic.
Is it a buyer’s market or a seller’s market?
The greater the demand, the higher the home prices. If your neighborhood has properties for sale, but few buyers, it may be a sign that the area is going through a downturn and prices may fall.
Is your home in good condition?
Even if everything is structurally sound, cosmetic damage, an unkempt yard and even a messy interior can count against your appraisal value.
Are there comparable properties?
Comparable properties (often referred to as “comps”) are homes in your area an appraiser compares to yours to help determine your home’s value. If you have a three-story home, the appraiser will compare your home to other three-story homes in your area.
How To Dispute a Low Home Appraisal for a Refinance
If your appraisal is low and you don’t know why, the first thing to do is not panic. Home appraisers are professionals – but they aren’t perfect.
This is especially true if there are a limited number of professional appraisers in an area, and they’re pressed for time because of increased demand.
A study by Fannie Mae found that home appraisals come in below value around 8% of the time. And that number has been increasing in recent years.
Read the report
After the appraisal, request a copy of the appraisal report and read it carefully.
Did the appraiser:
- Describe the method used to assess your home’s value?
- Perform an in-person or drive-by inspection or was it all done using online research?
- Correctly estimate the square footage and include the garage and other non-living spaces?
- Base their appraisal on comparable properties?
- Count the correct number of bedrooms and bathrooms?
- List all the amenities, including fireplaces, patios and pools?
- Include any home repairs and renovations, like a new roof or renovated kitchen?
- Mention energy-saving improvements, like new appliances or solar panels?
If you feel the appraiser missed something important, contact your real estate agent and lender. Document everything – but don’t forget to be polite.
Get a second opinion
If the appraiser is unwilling to adjust the price based on your feedback, you still have options.
Your lender selected the appraiser, but that doesn’t mean they’re the only option. Talk to your lender about ordering a second appraisal.
If you determine there’s something you would like to dispute in the appraisal, work with your lender and real estate agent to show where the appraiser made an error.
Once you are able to show the inaccuracies on the appraisal and your lender agrees, your lender can request that the appraiser correct the report. If the appraiser refuses to make changes, you might be able to request a second opinion.
Don’t Let a Low Appraisal Slow Down Your Financial Goals
A low appraisal can happen, but it doesn’t mean it’s the end. Consider all your options, including exploring a cash-in refinance or applying to a homeowner’s relief program. You can also be an advocate for your home and ask for a second appraisal.
Fannie Mae. “Credit Risk of GSE Loans.” Retrieved October 2022 from https://www.aei.org/wp-content/uploads/2017/08/Fout-Panel-VI.pdf