Key Takeaways
- Lenders use the lower of purchase price or appraised value for loan calculations.
- Low appraisals reduce loan amounts because lenders calculate based on the appraised value.
- You can negotiate price, bring more cash, or request a second appraisal.
Why does a low appraisal change my loan amount?
You're wondering why a low appraisal changes how much the lender will approve for your loan. Lenders base loan amounts on the lower of two numbers: the home's purchase price or its appraised value. This protects the lender if they need to sell the home later to recover their money.
When an appraisal comes in below the purchase price, the lender treats the appraised value as the home's worth for loan calculations. If you're getting an 80% loan-to-value mortgage and the appraisal shows the home is worth less than you agreed to pay, the lender calculates that 80% based on the lower appraised amount, not your contract price.
You can ask the lender to walk you through the new loan amount calculation. Check whether the appraisal affects your down payment requirements or loan terms. Common options include negotiating with the seller to lower the price, bringing more cash to closing to cover the gap, or ordering a second appraisal if you believe the first one missed important details about the property.
