Low Appraisal on Your Refinance? What to Do Next
Refinancing is a simple process for most homeowners. Unless your financial situation has changed drastically, you will likely re-qualify for a loan. But what if your home gets appraised for less than you anticipated?
A low appraisal on your refinance can be a hiccup, but it doesn't have to ruin your plans. Here’s what to do if you run into an issue.
How a Low Appraisal Affects Your Refinance
Lenders use these expert evaluations when deciding how much they’re willing to lend against a property.
A common loan-to-value, or LTV, for refinancing is 80% (you have 20% equity). This is a $240,000 refinance loan on a $300,000 home. No mortgage insurance is required at this LTV.
But what if the home appraises at $290,000? You’re at 83% LTV. You either pay mortgage insurance or come up with $8,000 at closing to reduce your LTV to 80%.
Even if mortgage insurance isn't an issue, a higher LTV can mean higher interest rates. For example, a conventional borrower with a 75% LTV could expect lower rates than if they were refinancing at 85% LTV.
What to Do if Your Appraisal Comes in Low
Your refinancing plans aren’t necessarily derailed just because you’ve had an appraisal come in low. There are still several ways that you can move forward and potentially salvage your refinance.
Check the Appraisal Report for Errors
After receiving a low appraisal, comb through the appraisal report for errors. The lender is legally required to give you a copy of the report.
Some of the most essential things to double-check are:
Square footage
Number of bedrooms and bathrooms
Value-adding features (such as a pool, deck, or accessory dwelling unit)
Major renovations or repairs (such as a new roof or finished basement)
You will also want to look into the appropriateness of the comparable properties. These are the recently sold nearby homes that the appraiser used as a basis for their valuation. The more similar a property is to the one being appraised, the better of a "comp" it's considered to be.
It's possible to dispute comparable properties that:
Are substantially different from your home
Were sold more than six months prior
Were sold as a short sale or foreclosure
Are located in a less desirable neighborhood or school district
If you believe you've found a legitimate issue with your low appraisal report, have your lender request a Reconsideration of Value.
Submit an Appraisal Rebuttal
If you find errors or missing facts, work with the lender to submit an appraisal rebuttal. This is an official document showing why you disagree with the determined value.
Submit errors, comparable sales, upgrades, and other elements that support a higher value.
The appraiser never has to change his or her appraisal. In fact, rebuttals usually don’t work. But they are still worth the effort on the off chance that the appraiser accepts your argument.
Ask Your Lender to Order a Second Appraisal
If all the information on the appraisal is factually correct, but you still disagree with the appraiser's subjective valuation, ask your lender to order a second appraisal.
Not all lenders may be willing, and if you opt for this route, you'll be responsible for paying both appraisal fees. But the cost of a second, independent valuation could be well worth it if you're confident the first appraisal was a fluke.
Similarly, if your original appraisal resulted from an automated valuation model (AVM), request that your lender complete a traditional in-person assessment instead.
Apply With a Different Lender
If your lender isn’t willing to order a second appraisal and otherwise can’t complete your refinance as planned, your only option may be to shop around and apply with another mortgage company.
You’ll still be on the hook to pay for your first appraisal, and going through the process with another lender will mean paying for a second with no guarantee your property will be valued any higher.
Examine Streamline Refinance Options
If your current loan is backed by the FHA, VA, or USDA, you may qualify for a streamline refinance. These low-doc rate-and-term refinances let you reduce your interest rate or otherwise improve your mortgage terms without requiring an appraisal in most cases.
Plus, you'll unlikely need to go through an in-depth credit check or income verification process.
To qualify, you must already have a mortgage guaranteed by one of these agencies. But if your current loan fits the bill, here are the programs to consider:
USDA Streamlined-Assist Refinance
Reevaluate Your Cash-Out Needs
Did your appraisal come in low on a cash-out refinance? In most cases, you’ll need at least 20% equity left over after closing. The exception is a VA cash-out refinance, which allows you to withdraw up to 100% of your home’s equity.
Rather than continuing with a cash-out refinance, get a rate-and-term refinance. Add a home equity line of credit (HELOC) after closing. Some lenders allow HELOCs up to 100% of your home’s value.
Consider a “Cash-In” Refinance
Is your low appraisal keeping you from qualifying for a refinance? Perhaps you were planning to refinance and remove PMI from your loan, but now your LTV is above 80%. If you’re close to where you need to be, you may want to consider a “cash-in” refinance.
Cash-in refinance is a term for when you bring extra funds to closing to reduce your loan balance and improve your loan-to-value ratio.
While it may not be ideal, a cash-in refinance can be wise if refinancing would drastically lower your monthly payment. This could be because you're dropping to a lower interest rate or eliminating monthly mortgage insurance.
Refinancing with a higher percentage of equity can also help reduce your interest costs further. If a cash-in refinance is a practical option, ask your loan officer how bringing cash to closing could move you into a lower LTV range and potentially reduce your rate.
How to Prevent a Low Appraisal
Appraisals are meant to be an objective evaluation of your home. But appraisers are human, and a cluttered, unkept property has the potential to skew their opinion negatively.
If you're planning to have a second appraisal completed, or if you're being proactive to avoid your first appraisal coming in low, there are some steps that you can take to help showcase your home in its best light.
Before your in-person appraisal appointment, you may want to:
Complete lawn care and basic landscaping projects
Tidy up your interior and keep all walkways clear
Ensure all major appliances work as intended
Check that all faucets and drains function properly
Catch up on any deferred maintenance
Refinancing With a Low Appraisal
A low appraisal can throw a wrench into your refinancing plans, but it doesn't have to. There are many ways that you can still move forward with a refinance, even if your home's valuation didn't come in as high as you expected.
If you cannot refinance with your current lender, shop around and apply with another mortgage company that can review your alternatives and order a new appraisal as needed.
Start your refinance or get a second opinion about your appraisal.
Tim Lucas is the editor and Lead Analyst for MortgageResearch.com. Tim spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. He has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.
