In the complex web of the homebuying process, a few steps are as critical as the VA appraisal. This meticulous assessment, conducted by a certified appraiser, serves as the key factor that determines the fair market value of a property.
For those utilizing a VA loan, this valuation is not merely a formality; it is a critical component that can significantly impact the outcome of the transaction.
The primary focus of this article is to shed light on what happens when a VA appraisal delivers news that’s not always welcome—when the appraised value falls short of expectations.
In such moments, prospective homebuyers can find themselves at a crossroads, facing important decisions that require careful consideration.
So, if you’ve ever wondered what to do when a VA appraisal comes in lower than expected, read on as we guide you through this crucial aspect of the homebuying journey. Or contact Sprint Funding today.
Our experienced mortgage specialists can help you understand your options, including contesting the appraisal or renegotiating with the seller. With Sprint Funding by your side, you can turn a potential setback into a smooth path toward homeownership success.
Understanding VA Appraisals
The VA appraisal is an important part of the homebuying process in the world of VA loans. It’s essential to grasp the significance of this process and how it fits into the broader context of obtaining a VA-backed mortgage.
VA appraisals are an integral part of the VA loan process. They serve as a crucial mechanism to protect both the lender and the borrower.
Here’s a breakdown of their role:
- Property Valuation: The primary function of a VA appraisal is to assess the fair market value of the property you intend to purchase. This involves a thorough evaluation of the property’s condition, features, and comparative value within the local real estate market.
- Risk Mitigation: For lenders, VA appraisals help mitigate risk by ensuring that the property’s value aligns with the loan amount requested. This step ensures that the lender is not extending a loan that significantly exceeds the property’s worth, which can be financially risky.
- Borrower Protection: VA appraisals also protect the interests of the borrower. By determining the fair market value, the appraisal helps ensure that the borrower is not overpaying for the property. It provides assurance that the purchase price is reasonable and reflects the current market conditions.
Purpose of a VA Appraisal: Determining Fair Market Value
The central purpose of a VA appraisal is to establish the fair market value of the property. But what does “fair market value” mean, and why is it so critical in the context of VA loans?
Fair market value (FMV) refers to the price that a knowledgeable and willing buyer would pay and a knowledgeable and willing seller would accept in an open and competitive market.
In essence, it represents the most probable price that a property should bring in a free and open market under typical conditions.
Here’s why determining the fair market value is crucial:
- Loan Amount: The fair market value is used to calculate the maximum loan amount the VA will guarantee. The VA will guarantee a percentage of the loan, but this guarantee is typically based on the appraised value, ensuring that the lender is protected in case of default.
- Negotiation: The appraisal provides a baseline for negotiations between the buyer and the seller. If the appraised value comes in lower than the purchase price, it can impact the terms of the sale and potentially lead to renegotiations.
- Protection for All Parties: Establishing a fair market value protects both the borrower and the lender from making financially unsound decisions. It prevents borrowers from overpaying for a property and lenders from lending more than the property is worth.
VA appraisals are a critical component of the VA loan process. They serve to determine the fair market value of a property, ensuring that the transaction is fair and equitable for both the buyer and the seller while mitigating financial risks for lenders and borrowers alike.
How Often Do VA Appraisals Come in Low?
One common question that often arises in the context of VA loans is how frequently VA appraisals come in lower than the expected purchase price. While the goal of any appraisal is to accurately reflect the property’s fair market value, there are instances where the appraised value falls short of the anticipated amount.
Let’s explore the factors that contribute to low VA appraisals and how often they occur.
Frequency of Low VA Appraisals:
Low VA appraisals, where the appraised value is less than the expected purchase price, do occur. However, their frequency can vary widely depending on several factors, including:
- Local Market Conditions: The prevalence of low VA appraisals often correlates with the dynamics of the local real estate market. In areas with high demand and rising property values, low appraisals may be less common. Conversely, in markets with stagnant or declining property values, they may occur more frequently.
- Seller’s Pricing Strategy: The initial listing price set by the seller can influence whether a VA appraisal comes in low. If the seller’s asking price significantly exceeds the property’s true market value, it increases the likelihood of a low appraisal.
- Competitive Bidding: In competitive markets where multiple buyers are vying for the same property, the winning bid can sometimes surpass the property’s actual worth. This can lead to situations where the VA appraisal comes in lower than the purchase price.
- Property Condition: The condition of the property plays a pivotal role in the appraisal process. If the property has significant structural or maintenance issues, it can result in a lower appraised value.
- Appraiser’s Expertise: The experience and knowledge of the appraiser can also influence the outcome. An experienced appraiser familiar with the local market is more likely to provide an accurate valuation.
- Economic Factors: Broader economic factors, such as interest rates and economic downturns, can impact property values and, consequently, appraisal outcomes.
Mitigating Factors for Low VA Appraisals:
While low VA appraisals can pose challenges, it’s important to remember that they are not insurmountable obstacles. Homebuyers and sellers can take several steps to address or mitigate the impact of a low appraisal:
- Negotiate: If a VA appraisal comes in lower than the purchase price, buyers and sellers can negotiate to reach a mutually acceptable agreement. This may involve renegotiating the purchase price, requesting
repairs, or considering concessions. - Reappraisal: In cases where the appraised value appears significantly lower than expected, homebuyers have the option to request a reappraisal. A different appraiser may be assigned to reevaluate the property.
- Seller Concessions: Sellers can offer concessions, such as covering closing costs or making necessary repairs, to bridge the gap between the appraised value and the purchase price.
- Additional Down Payment: Buyers may choose to make a larger down payment to cover the difference between the appraised value and the loan amount.
Low VA appraisals are not uncommon, and their frequency can be influenced by a range of factors, including local market conditions and property conditions. However, they are not necessarily roadblocks to a successful home purchase.
With careful negotiation and consideration of available options, both buyers and sellers can navigate the challenges posed by low appraisals and move forward with their real estate transactions.
Can You Get a VA Loan for More Than the Appraised Value?
When it comes to VA loans, there is a specific policy regarding loan amounts and appraised values. Generally, the VA loan program is designed to ensure that the loan amount does not exceed the appraised value of the property being purchased.
However, there are situations where it might be possible to secure a VA loan for an amount exceeding the appraised value, although these scenarios are relatively limited.
VA’s Policy on Loan Amounts and Appraised Values
The VA has a fundamental policy guideline that the loan amount cannot exceed the appraised value of the property.
This policy is in place to protect both the borrower and the lender from entering into a transaction where the property’s value does not support the loan amount. It prevents borrowers from borrowing more money than the property is worth, which is essential for responsible lending practices.
Scenarios Where a VA Loan May Exceed the Appraised Value
While the general rule is that a VA loan should not exceed the appraised value, there are a few specific scenarios in which it might be possible:
1. Energy-Efficient Improvements
The VA allows borrowers to include the cost of certain energy-efficient improvements (such as solar panels, insulation, or energy-efficient HVAC systems) in the loan amount. 
In these cases, the loan amount can exceed the appraised value, but only by the amount of the energy-efficient improvements.
2. Seller Concessions
In some cases, the seller of the property may agree to pay for certain closing costs or repairs that exceed the appraised value. While this doesn’t increase the loan amount directly, it can reduce the borrower’s out-of-pocket expenses.
3. Cash Payment by the Borrower
If the borrower is willing and able to pay cash out of pocket to cover the difference between the appraised value and the desired loan amount, it can be allowed.
This situation is relatively rare and typically occurs when borrowers are committed to purchasing a specific property despite a low appraisal.
4. Subordinate Financing
Borrowers can obtain a second mortgage or home equity loan to cover costs that exceed the appraised value. While this doesn’t increase the primary VA loan amount, it provides additional funds for the transaction.
It’s important to note that each of these scenarios has specific guidelines and requirements. Borrowers should work closely with their lenders to ensure that any deviation from the appraised value is done in compliance with VA regulations and that they fully understand the financial implications of such arrangements.
While VA loans are generally designed to match the loan amount with the appraised value to ensure responsible lending, there are specific situations in which a VA loan may exceed the appraised value.
These scenarios are typically limited to specific circumstances, such as energy-efficient improvements, seller concessions, or borrower cash payments, and are subject to VA guidelines and lender approval.
Strategies for Dealing with a Low VA Appraisal
A low VA appraisal can be a challenging hurdle for homebuyers to overcome, but it’s not an insurmountable obstacle. If you find yourself facing a VA appraisal that falls short of your expected purchase price, there are several practical strategies you can employ to navigate the situation effectively.
Here are some valuable tips:
Renegotiate the Purchase Price:
- Open Communication: Start by discussing the appraisal results with the seller or their agent. Open and respectful communication can pave the way for renegotiation.
- Provide Evidence: Share any relevant information or recent comparable sales (comps) with the seller or their agent to support your argument for a higher purchase price. Sometimes, the appraiser may have missed critical data.
- Flexibility: Be open to negotiating a new purchase price that is more in line with the appraised value. A compromise may be necessary to move forward with the transaction.
Request a Reconsideration of Value:
- Gather Evidence: If you believe the appraisal was flawed or inaccurate, you can request a reconsideration of value (ROV) through your lender. Provide compelling evidence to support your case, such as additional comps or documentation of property improvements.
- Engage the Appraiser: In some cases, you may be able to engage in a constructive conversation with the appraiser to clarify any discrepancies or misunderstandings.
- Lender’s Involvement: Your lender will typically handle the ROV process. They will review your evidence and, if they find it compelling, may submit it to the appraiser for reconsideration.
Bring Additional Funds to Closing:
- Consider Covering the Gap: If you are committed to purchasing the property despite the low appraisal, you can choose to bring additional funds to the closing table to cover the difference between the appraised value and the purchase price.
- Evaluate Your Financial Situation: Carefully assess whether you have the financial means to cover the gap without straining your budget. Bringing in additional funds should be a well-thought-out decision.
Explore Seller Concessions:
In some cases, sellers may be willing to offer concessions, such as covering closing costs or making necessary repairs, to bridge the gap between the appraised value and the purchase price. This can reduce the financial burden on the buyer.
Consider Alternative Financing Options:
If the low appraisal presents insurmountable challenges, consider exploring alternative financing options. You might look into conventional loans, FHA loans, or other loan programs that may be more flexible in such situations.
Reevaluate Your Budget and Priorities:
- Reflect on Your Priorities: Take a step back and reassess your homebuying priorities. Is this property worth the additional effort and financial investment, or are there other homes that may offer better value?
- Stay Realistic: It’s essential to remain realistic about your budget and financial limits. While homeownership is a significant milestone, it should not jeopardize your long-term financial stability.
Final Thoughts
In real estate, flexibility and diligence are of the utmost importance. While a low VA appraisal may present challenges, it does not have to derail your homeownership dreams.
With the right strategies, communication, and documentation, you can explore this obstacle and move closer to securing the home that fits your needs and aspirations. Remember that being prepared for all aspects of the homebuying journey, including potential appraisal issues, is a hallmark of a successful and informed homebuyer.
If you’re a homebuyer dealing with a low VA appraisal, don’t let it derail your dreams of homeownership. At Sprint Funding, we are dedicated to helping you explore every step of the homebuying process.
Our team of experienced mortgage professionals can guide you through the complexities of VA loans and appraisals, helping you explore your options and make informed decisions. Remember, a low appraisal doesn’t have to be a dead end.
With the right guidance and a flexible approach, it’s possible to turn this hurdle into a stepping stone towards securing your dream home. So why wait? Contact Sprint Funding today and take one step closer to your homeownership dreams.
