What happens when a house doesn't appraise for the sales price?

With rising prices in the Dallas housing market, one of the biggest concerns for a home seller is the appraisal. Because appraisers determine value based on sales over the past few months, sometimes the appraisal can come in below the price a seller can currently get for their property. And the common perception is that if the house doesn't appraise, then a buyer can't get a loan to purchase it. And no seller should limit their buyer pool to only cash buyers.

But an appraisal that falls short of the sales price is not always the kiss of death for the sale. Real Estate Attorney Ashley Cook explains, "The Contract does not require that the property appraise for the sales price nor does it require that the buyer obtain an appraisal. The lender, in its sole discretion, can decide to make a loan whether or not the sales price meets or exceeds the appraised value."

Where it gets difficult is that each lender has different criteria for loan approval and typically the lower the down payment, the more important the appraisal number. Our Texas residential property contracts indicate that "if the property does not satisfy the lenders’ underwriting requirements for the loan(s)(including, but not limited to appraisal, insurability and lender required repairs), the buyer may terminate this contract ...”

So basically, if the buyer's mortgage company will not give them a loan because the appraisal came in too low, then the buyer can walk away and get their earnest money back. Let's say an appraisal comes in 7% below the purchase price. If the buyer is financing 95% of the purchase price and/or their lender is tight, you have a big problem. If that same buyer is financing 50% of the purchase price, then it probably isn't an issue. The more cash a buyer will able to put down, the lower the chance the lender will reject the loan - regardless of the sales price.

"The question to be asked when the appraisal comes in lower than the sales price is not what are the parties going to do, but will the lender make the loan," says Cook. "If the lender will not make the loan the buyer should obtain that in writing. If the lender will make the loan then the buyer must close on the property for the agreed upon price even if it is more than the appraised value."
[where: 75230]