Low Home Appraisal: Why It Happens and How It Can Affect Your Refinance

What a low home appraisal means

A low home appraisal occurs when a property’s appraised value comes in below the agreed-upon purchase price, the lender’s required loan amount or the homeowner’s desired refinancing value. In other words, the home is valued for less than what a buyer offered, what a seller expects or what a homeowner hopes to borrow against when refinancing.

For example, if a homeowner wants to refinance a mortgage for $300,000, but the appraiser values the property at $280,000, the appraisal is considered low. Lenders typically base loan amounts on the appraised value, not the requested refinance amount. This can reduce available cash-out options, increase interest rates or require the borrower to adjust the loan terms.

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 expected value, borrowers sometimes 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 or those located in different areas), it can negatively impact 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 thoroughly cleaning or purging 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 to make tough decisions about your refinance application.

• You may need to postpone refinancing. With a low appraisal, you may need to wait until more favorable comps arise to receive a better valuation.
• You may not be able to eliminate 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 need to switch to a different loan type. 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.

» MORE: Complete checklist of mortgage refinance requirements

What to do if your appraisal comes in low

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

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

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 the report was written.
• Get a second opinion. Some lenders allow borrowers to pay for a second appraisal if they dispute 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, request a comprehensive appraisal that includes a thorough 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 need to apply for a new loan to obtain a new appraisal or consider a refinance option that doesn't require an appraisal.

How to appeal a low appraisal

Following these steps improves your chances of achieving a more accurate home valuation and may help you secure better financing terms.

Communicate clearly with your lender throughout the process, keep records of all submitted materials and be ready to negotiate or adjust your loan terms if the appraisal is revised.

1. Review the appraisal report carefully: Check for errors in square footage, property features or overlooked upgrades. Even small mistakes can affect value.
2. Gather supporting comparable sales: Identify recent sales of similar homes in your area that justify a higher value.
3. Document home improvements: List renovations, upgrades or unique features the appraiser may have missed. Include receipts or photos if possible.
4. Request a reconsideration of value: Submit your supporting evidence to your lender and ask the appraiser to review it.
5. Consider a second appraisal: If the first appraisal is still disputed, paying for an independent appraisal may help resolve the issue.

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. Consult with your loan officer or mortgage broker to determine if your home meets the qualification requirements.
• 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-point 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.

» MORE: What is an appraisal waiver?