Once buyers have an accepted offer on a new home in Illinois and are steadily progressing through the mortgage financing process, one major worry that emerges is the possibility of the appraisal valuation coming back lower than the agreed-upon purchase price. In that scenario, many buyers immediately wonder – Can my loan actually be denied if the appraisal shows a value lower than my contract price?
Can a loan be denied after appraisal?
Yes, a loan can be denied after appraisal – at least for the loan amount requested. This could occur if the home’s appraised value is lower than the proposed purchase price, if major issues impacting safety or value are discovered, or if the buyer can’t cover the gap between purchase price and approved loan amount as determined by the appraised value.
In such situations, you may contest a low appraisal by providing additional data or comps missed by the appraiser. Despite these hurdles, with expert guidance and swift action, potential denial can often be circumvented.
1. Appraised Value Too Low to Support Loan Amount
If the appraiser determines the home is worth $200,000 based on their valuation, but the buyer’s loan was pre-approved and requested for a higher amount based on a $250,000 purchase price, the lender may deny that loan amount.
Even if the buyer qualifies for the loan based on income and credit, the property value itself has to support the loan amount.
2. Appraisal Uncovers Major Flaws Impacting Safety or Value
In some cases, the property appraisal may reveal previously unknown issues impacting the home’s safety, structural integrity, or value.
Examples are troubled foundation or compromised roof that makes the home a bad investment, significant water infiltration and mold, drainage issues, failure to meet guidelines on safety and health hazards, plumbing, heating and weatherproofing etc.
If severe enough to materially impact valuation beyond simple repairs, the risk of denial increases. This most often occurs with FHA loans, where the appraisal must take into account condition and safety issues with the property.
3. Appraised Value Causes Loan-to-Value (LTV) Ratio to Exceed Lending Limits
The home needs to appraise high enough so that the actual loan amount the buyer wants to borrow remains at or below the lender’s allowable loan-to-value ratios.
For a conventional loan, this is typically 80% LTV. If the appraisal comes back lower than expected and causes the LTV to exceed these limits, a lender may deny the loan.
4. Buyer Lacks Funds to Cover Gap Between Appraised Value and Contract Price
If the appraisal valuation comes back lower than the amount the contract was written for, the buyer has to make up that difference in cash with a higher down payment.
If the buyer cannot cover the gap in value due to lower appraisal, the loan will be denied.
If the appraised value creates any sort of obstacle or inability for the buyer to purchase the property with the approved loan amount, loan-to-value, or down payment requirement, it opens the door for the loan to be denied.
That said, if the appraisal is just slightly lower, lenders may ask for more data but still potentially approve in many situations. It’s not always an automatic denial.
However, all parties must act quickly to appeal or address appraisal issues if they threaten loan eligibility.
Can I Contest or Appeal a Low Appraisal?
If you believe your lender’s appraiser made a valuation mistake or overlooked key details that justify a higher value, you may appeal.
Gather additional comps the appraiser missed or data to support higher valuation and present your case. However, the appeals process typically adds 1-2 weeks to the timeline.
The key is having an experienced loan officer or mortgage broker who can help guide you through addressing appraisal issues should they arise. With proper assistance, a low appraisals can often be overcome through negotiations, appeals, or providing more data. But you need to be prepared to act quickly.