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Low home appraisal: why it happens and how it can affect your refinance

If your appraisal comes in low, don’t panic: You have options

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When you’re refinancing your mortgage, your home's appraised value has a major impact on how much of a loan you can get.

An appraisal is an independent assessment of your home's value that a lender uses to approve your loan. The appraisal, which is different from a home inspection, is a factor in your loan-to-value (LTV) ratio and how much a lender will let you borrow. If you receive a low home appraisal, that will have a negative effect on your refinance.

Learn about appraisals, why they may come in low and how that affects your application. Plus, find out which loans allow you to refinance your mortgage without an appraisal.


Key insights:

  • An appraisal determines your mortgage's LTV ratio.
  • You can appeal a low valuation by comparing it with home sales in your area or correcting mistakes in the report.
  • If your appeal fails, some lenders will waive the appraisal requirement on eligible loans.

Why does a home appraisal come in low?

Appraisals are an independent determination of your home's value based on market conditions and trends. While most appraisals come in at the value expected, sometimes, borrowers receive a low home appraisal, which can derail their mortgage refinance.

Here are some of the reasons why your appraisal may come in lower than expected:

  • You’ve overestimated the value of property renovations: Homeowners are emotionally involved in their home, so they often believe their home is worth more than it is. While renovations often add value, over-personalizing the home can actually reduce the impact of those upgrades.
  • Inexperienced or out-of-town appraiser: Appraisers who aren't familiar with your area or who don't have much experience may not fully understand the true market value of your neighborhood.
  • Inaccurate comps: Comparisons against recent home sales are an integral part of an appraisal. If the wrong comps are chosen (e.g., homes with incomparable features, homes that are located in different areas), it can hurt the value of your home's appraised value.
  • Changing market conditions: A hot housing market can quickly turn cold. Appraisers often factor in market trends when valuing a home to avoid overstating a home's value.
  • Messy or cluttered home: When your home is messy or cluttered, it can hide its true beauty — and its true value. Consider a thorough cleaning or purging of unnecessary items before your appraisal appointment.
  • Bad curb appeal: An unkempt yard can detract from your home's appearance. Trim bushes and trees, mow your grass, plant flowers, remove weeds, and take other steps to make the outside of your home just as beautiful as the inside to get the highest appraised value.

How does a low appraisal affect your refinance?

When your appraisal comes in low, it can affect your mortgage refinance in multiple ways. If that happens, you may have tough decisions to make about your refinance application.

  • You might have to put off refinancing. With a low appraisal, you may have to wait until more favorable comps occur to get a better valuation.
  • You might not be able to get rid of PMI on a conventional loan. Most lenders do not require private mortgage insurance (PMI) if your loan-to-value (LTV) ratio is 80% or lower. If your appraisal is too low, your LTV may be higher than this cutoff.
  • You might get less cash if you’re doing a cash-out refinance. For cash-out refinances, a low appraisal can reduce or eliminate your ability to withdraw money from your home.
  • You may have to switch loan types. Depending on your ability to qualify for a refinance, you may have to switch to a different loan type in order to get your application approved. For example, you may have to switch from a conventional loan to an FHA loan.

What to do if your appraisal comes in low

Cindi Conley, a 30-year mortgage lender and creator at Mortgage and Money Talk, said, "Appraisals are a combination of data and subjectivity. An appraiser gathers the most recent data for the best comparision of 'like properties' to your home. Then they interpret the data to come up with a current value for the subject."

If the appraisal comes in too low, it is possible that the appraiser missed key data or overlooked more favorable comps.

If your home appraisal is too low, don't give up hope for your mortgage refinance. You still have options that can salvage your loan request.

  • Check comparable sales in the neighborhood. Review recent sales to ensure that the most favorable closed sales are included in your appraisal. Your appraiser may have missed them, or new sales may have closed since they wrote the report.
  • Get a second opinion. Some lenders allow borrowers to pay for a second appraisal if the borrower disputes the first appraiser's report.
  • Ask your real estate agent for advice. Your real estate agent may be able to provide guidance on recent comps or other steps you can take to increase your home's value.
  • Ask for a full appraisal. Some lenders use desktop or "drive-by" appraisals, which are cheaper but less thorough. If the value is too low, ask for a full appraisal that includes a walk-through of your home.
  • Look for errors in the report. Appraisers are humans, too, and they make mistakes. The appraisal may be missing some of your home's features, have the wrong square footage or lot size or have other errors that affect the valuation.
  • Consider appealing the appraisal. If there are material mistakes in the report that affect your home's value and mortgage application, you can appeal the appraisal.
  • Apply for a new loan. As a last resort, you may have to apply for a new loan to get a new appraisal or use a refinance option that doesn't require an appraisal.

If you'd like to appeal your appraisal, follow these steps:

  1. Review the appraisal for errors or omissions.
  2. Make a list of favorable comps.
  3. Consider paying for a second appraisal.
  4. Submit a reconsideration of value.

Refinancing without an appraisal

While most lenders require an appraisal, not all mortgage refinances require one. Here are a few refinancing options that do not require an appraisal.

  • Appraisal waiver: Some lenders offer appraisal waivers for loans that meet specific LTV criteria. Speak with your loan officer or mortgage broker to determine if your home qualifies.
  • Fannie Mae’s RefiNow: This program allows for an appraisal waiver when an existing Fannie Mae borrower gets an interest rate reduction of at least 50 basis points and lowers their monthly payment.
  • Freddie Mac’s Refi Possible: Eligible Freddie Mac borrowers can receive an appraisal waiver on loans that offer at least a 50 basis points reduction in the interest rate.
  • Streamline refinance programs: Streamline refinances of FHA, VA or USDA mortgages often do not require an appraisal, but requirements vary by lender.

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    FAQ

    How much does a home appraisal cost?

    Appraisal costs vary across the country and often depend on the type of property being evaluated. A typical home appraisal costs around $450 to $550 but may reach $1,000 or more for some borrowers.

    How long does it take to complete a home appraisal?

    Many factors impact how long it takes to complete a home appraisal, including the property type, the appraiser's schedule and the complexity of the appraisal. Most appraisers take an average of 30 minutes to three hours to walk through and evaluate your home. Appraisers typically complete appraisals and return them to the lender within two days to two weeks.

    Remember that an appraisal is different from a home inspection, and the home inspector will look for different things than an appraiser. As a result, the time frame for each is different.

    Who pays for the property appraisal in a refinance?

    When refinancing a mortgage, the borrower typically pays for the appraisal. In most cases, you'll pay for the appraisal online or over the phone with your credit card when booking the appraisal appointment.

    Bottom line

    An appraisal is a key element of the mortgage refinance process. While most appraisals come in at or above the value expected, sometimes borrowers receive a low home appraisal. When this happens, you need to take action immediately to challenge the appraisal and try to get a higher valuation. If that fails, you may try applying for mortgages that waive the appraisal requirement in order to get your new loan approved.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
    1. Experian, "Can I Refinance My Mortgage Without an Appraisal?" Accessed Dec. 11, 2022.
    2. Fannie Mae, "RefiNow." Accessed Dec. 11, 2022.
    3. Freddie Mac, "Refi Possible." Accessed Dec. 11, 2022.
    4. U.S. Department of Agriculture, "Streamlined Assist Refinance Loans." Accessed Dec. 11, 2022.
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