When you’re in the process of buying a home, getting an appraisal is a crucial step that lenders take to determine the property’s value. It ensures that the loan amount is in line with the actual worth of the home. If the appraisal comes back lower than the purchase price, buyers may need to come up with additional funds to bridge the gap between the property’s value and the loan amount.
However, if the appraisal comes in higher than the offer, it’s typically good news for buyers. A higher appraisal means that the home is valued more than what you’re paying, giving you equity from the get-go. While this doesn’t impact your loan terms or down payment, it can benefit you in the future when you refinance, remove PMI, or sell the property.
Here’s what happens when the appraisal exceeds your offer, whether you’re purchasing a home in Asheville, NC, or a house in Austin, TX.
Is it Beneficial if the Appraisal Surpasses the Offer?
When the appraisal indicates that the home’s value is higher than the purchase price, it could be due to several factors such as comparable homes selling for more, unnoted upgrades in the property, a rapidly appreciating market, or the home being underpriced.
Additionally, a higher appraisal can bring certain advantages for buyers:
1. Instant Equity
Equity represents the difference between a home’s value and the amount owed. With a higher-than-offer appraisal, you start your homeownership journey with built-in equity.
Example:
- Purchase price: $400,000
- Appraised value: $420,000
- Instant equity: $20,000
While this equity doesn’t alter your loan structure, it does provide you with a stronger financial position before you even move in.
2. LTV is Based on the Purchase Price
Even with a higher appraisal, lenders calculate your loan-to-value ratio (LTV) using the lower value between the appraised value and the purchase price. This can improve your LTV ratio, as the loan amount is still determined by the lower purchase price rather than the higher property value.
3. Potential to Remove PMI Sooner
While a high home appraisal doesn’t immediately impact PMI costs, starting with higher equity may help you reach the 20% equity threshold or 80% LTV ratio faster. Depending on your loan servicer, you might have the opportunity to eliminate PMI earlier than expected by refinancing and confirming the higher home value.
Will a Higher Appraisal Affect My Down Payment or Loan?
No, a higher appraisal doesn’t reduce your required down payment or alter your mortgage terms. Lenders typically base the loan amount and down payment on the lower value between the purchase price and the appraised value.
When the appraisal exceeds your offer, the purchase price remains the lower figure, so your loan amount, down payment percentage, and interest rate remain unchanged. The higher appraisal doesn’t provide you with extra borrowing capacity; instead, it presents added equity without modifying your existing loan terms.
- Down payment: Still calculated as a percentage of the contract price.
- Loan amount: Determined using the lowest value between the purchase price and appraisal.
- Interest rate: Based on credit, loan program, and market conditions rather than the appraisal value.
A high appraisal merely confirms that the home is valued at least as much as you’re paying for it; it doesn’t alter the financing terms you’ve already agreed upon.
Can the Seller Withdraw if the Home Appraises Higher than the Offer?
Generally, a seller cannot terminate the purchase agreement solely because of a high appraisal. Once both the buyer and seller agree to a purchase price and sign the contract, that price is typically fixed from a loan perspective.
A seller may only be able to back out following a high appraisal if:
- The buyer fails to meet the contract terms and obligations.
- A seller-specific contingency is included in the agreement.
- Both parties agree to cancel the contract.
A high appraisal by itself doesn’t give the seller the leverage to renegotiate the price or seek other offers. In fact, it’s uncommon for sellers to be informed of the appraisal results unless they come in below the offer price.
Are There Any Drawbacks to a High Appraisal?
While a higher appraisal is usually positive for buyers, there are scenarios where it could lead to minor drawbacks or complications.
1. Seller’s Second Thoughts on Pricing
A high appraisal may cause some sellers to doubt their pricing strategy. Although the report shouldn’t impact the contract, it might make sellers less flexible during repair requests or negotiations if they realize they undervalued the property.
2. Unchanged Down Payment and Monthly Payment
Despite the home being valued higher, lenders still base your loan on the lower of the purchase price or appraised value. Hence, your required down payment and mortgage payment remain the same without any reduction.
3. Impact on Property Taxes Expectations
Property taxes are determined by the county’s assessed value, which can increase over time in high-demand or rapidly appreciating markets. In some instances, multiple homes appraising above the list price might trigger higher tax assessments. Conversely, if the purchase price was lowered due to undisclosed repairs not reflected in the appraisal, future tax assessments may not align with the property’s actual worth.
4. Adjustment in Negotiation Dynamics
If the home appraises significantly above your offer, the seller may believe they’re already offering you a favorable deal. This could make subsequent negotiations more challenging, although appraisals typically occur after repair negotiations.
5. No Guarantee of Future Value
While a high appraisal reflects the current market conditions, it doesn’t assure future value. The housing market is subject to fluctuations over time, emphasizing the long-term nature of real estate investments.
Summary
Regardless of the housing market, commencing your homeownership journey with additional equity can be advantageous for buyers without requiring extra effort or fees. Your loan terms and down payment will remain consistent, but you can take pride in acquiring your new home for less than its present market value.
FAQs: Impact of a Higher Appraisal than the Offer
Is a Higher Appraisal Favorable?
Yes, a higher appraisal signifies that the home is valued above the agreed-upon price, providing the buyer with immediate equity. While it doesn’t alter loan terms, it enhances the buyer’s financial position and supports future objectives like refinancing or PMI removal.
Can a Bank Exceed the Appraised Value in Lending?
Lenders determine the loan amount based on the lower value between the purchase price and the appraised value. If the appraisal is higher, the lender won’t increase the loan amount to match it. The loan remains tied to the contract price. In the case of a lower appraisal, the lender might reduce the loan amount to align with the property’s actual value rather than the purchase price.
Can an Appraisal Harm the Seller?
A high appraisal doesn’t harm the seller, unlike a low appraisal that could necessitate price reductions or compromises on contract terms. The only potential downside of a high appraisal for a seller is that it may indicate the home was undervalued, but it doesn’t impact the signed contract.
Can the Seller Withdraw if the Appraisal Surpasses the Offer?
Generally, no, a seller can’t void the contract just because of a high appraisal. Once the purchase agreement is executed, the price is typically fixed unless there’s a seller-specific contingency in the contract, a price adjustment is proposed during repair discussions, or both parties agree to terminate the deal.