Appraisals and Property Value
If the appraisal comes in below the value you were expecting, the lender may base the mortgage on that lower number. That can create a cash shortfall on a purchase or reduce how much equity you can access through a refinance.
The Value the Lender Uses
They measure different things for different purposes. For your mortgage, the important number is the property value the lender is prepared to accept.
What You Agreed to Pay
This is the amount the buyer and seller agreed to in the contract of purchase and sale.
It tells the lender what you're paying, but it doesn't guarantee the property will be accepted at the same value for financing.
Property Assessment
BC Assessment estimates a property's market value as of July 1 of the previous year and uses that value as part of the property-tax system.
Because it reflects an earlier valuation date and serves a different purpose, it can be higher or lower than a current mortgage appraisal.
Mortgage Valuation
A mortgage appraisal provides an opinion of the property's current market value using the property itself and relevant market evidence, including comparable sales.
The lender reviews the appraisal and decides what value it's prepared to accept when calculating the mortgage.
A higher purchase price or BC Assessment doesn't require the lender to finance the property at that value.
If the lender accepts a lower value, the financing has to be recalculated. On a purchase, that can create a gap between the mortgage available and the money needed to complete the purchase. On a refinance, it can reduce how much equity you're able to access.
What Changes Next
On a purchase, a lower value can change how much of the purchase price the mortgage can support. On a refinance, it can reduce how much equity you're able to access.
When You're Buying
A low appraisal doesn't automatically reduce the price you've agreed to pay. Instead, it can reduce the value available to support the mortgage, which may leave a larger gap for you to cover.
If the lender accepts a value below the purchase price, the mortgage has to fit within the lender's loan-to-value limits using that accepted value.
The purchase price in your contract does not automatically change because the appraisal came in low. If less financing is available, you may need additional funds to cover the resulting shortfall.
A lower value can change the down payment, mortgage amount, mortgage-insurance structure or other parts of the approval. The numbers need to be recalculated before you know the actual impact.
When You're Refinancing
A refinance depends partly on how much equity is available in the property. If the accepted value comes in lower than expected, the maximum amount you can borrow may come down with it.
If the lender accepts a lower property value, the amount of usable equity in the home also becomes smaller.
A refinance is generally limited to 80% of the lender-accepted property value. A lower value means that 80% ceiling is lower too.
There may be less money available for debt consolidation, renovations, another purchase or whatever else the refinance was intended to fund.
The first step is to recalculate the mortgage using the lower value.
That's what tells you whether the appraisal creates a real shortfall, how large it is and what needs to change. Until those numbers are worked out, the difference between the purchase price and appraisal doesn't tell the whole story.
Let's Look at the Numbers
The appraisal gap itself doesn't tell you how much money you'll need or how much financing you'll lose. You have to recalculate the mortgage using the lender-accepted value.
Purchase Example
The buyer agrees to pay $750,000 and plans on a $600,000 mortgage, which is 80% of the purchase price. The lender accepts an appraised value of only $700,000.
Purchase price
Amount agreed to in the purchase contract
$750,000
Original mortgage plan
80% of the $750,000 purchase price
$600,000
Accepted appraised value
Lower value accepted for this example
$700,000
Mortgage at 80% of the lower value
Conventional financing example
$560,000
Additional cash in this example
Compared with the original 80% conventional mortgage plan
$40,000 more
How did the $40,000 shortfall happen?
The original plan used a $600,000 mortgage and $150,000 from the buyer. At 80% of the lower $700,000 value, the mortgage is $560,000. Because the seller is still owed $750,000, the buyer would need $190,000 toward the purchase to keep this financing structure.
A $50,000 appraisal gap does not automatically mean you need another $50,000.
In this example, the additional cash requirement is $40,000 because the original plan was conventional financing at 80% loan-to-value. If mortgage insurance is available and appropriate, or the original financing was structured differently, the result can be different. The mortgage needs to be recalculated before you know the actual shortfall.
These are simplified planning examples. Actual mortgage amounts depend on the borrower, property, lender, accepted property value and mortgage-insurance requirements where applicable.
What Can Happen Next
First, find out whether there is a legitimate reason to question the valuation. If the lower value stands, the next step is to rebuild the financing around that number.
Step One
If the appraisal may not reflect the property accurately, deal with that first. The goal is to identify factual errors or legitimate market evidence, not simply argue that the value feels too low.
Start with the basics. Make sure the square footage, bedrooms, bathrooms, parking, lot details, renovations, condition and other important property features are accurate.
If relevant recent sales were missed, or a comparable is materially different from the property, that may be worth raising through the lender.
Recent renovations, upgrades, unique property features or other relevant market evidence may matter if they were not reflected in the original appraisal.
A reconsideration gives the appraiser an opportunity to review legitimate new information. It does not mean the value will automatically increase.
A second appraisal or another valuation may sometimes be available, especially if another lender is being considered. The lender decides what valuation it will accept, and another appraisal does not guarantee a different result.
The goal is to correct or add genuine information, not keep ordering appraisals until one reaches the number you hoped for.
Step Two
Once you know the lender's accepted value isn't changing, the useful question becomes what can still work with that number.
Work out the mortgage amount, cash required and available equity using the value the lender is actually prepared to use.
On a purchase, the original mortgage structure may not be the only option. Depending on the borrower, property and mortgage-insurance eligibility, another structure may reduce the shortfall.
If the purchase still works with more money from the buyer, the next question is whether those funds are actually available and acceptable to the lender.
A buyer and seller may sometimes agree to renegotiate the price after a low appraisal. Whether that is possible depends on the contract, the seller and the circumstances of the purchase.
For a refinance, this may mean borrowing less, paying out fewer debts, reducing the cash being taken out or changing another part of the original plan.
Another lender may use a different valuation process or have different lending policies, but changing lenders can also affect the rate, qualification, timing and documentation. It does not guarantee a higher value.
If you're buying
The solution may be additional cash, different financing, a lower purchase price or a decision not to proceed. What you can do with the contract depends on its terms and any financing condition, so your Realtor or lawyer should advise you on the contract itself.
If you're refinancing
The refinance may still work. The question is whether the lower maximum mortgage leaves enough money to accomplish what you were trying to do after the existing mortgage, debts, penalty, legal costs and other expenses are paid.
A second appraisal is an option to investigate, not a solution to assume.
Sometimes another valuation or another lender makes sense. Sometimes the first appraisal stands. The important part is knowing which options are actually available before spending more money, changing lenders or changing the entire mortgage application.
Common Questions
Once you know how the lower value affects the mortgage, these are some of the other questions that can come up.
Not necessarily. Lenders can have their own appraisal requirements, approved providers, valuation methods and review processes. An appraisal completed for one lender may not automatically be usable by another.
Possibly. A new lender may be able to use an existing appraisal in some situations, or it may require a new valuation through its own process. Before changing lenders, it is worth looking at the entire mortgage, including the rate, qualification, timing and documentation, rather than changing lenders only in the hope of getting a higher value.
It depends on the lender and the situation. There may be another appraisal cost if a new valuation is required. Before ordering one, I would want to confirm that the appraisal can actually be used and that there is a reasonable reason to think another valuation is worth pursuing.
An appraisal is an opinion of market value, not an exact calculation. Appraisers may select different comparable sales, make different adjustments or place different weight on certain property features. Two well-supported appraisals can therefore arrive at somewhat different values.
A higher appraisal does not usually mean you can simply borrow against the difference when you buy the property. The purchase price still matters when the lender structures the financing, so the extra appraised value does not automatically become cash or immediately available equity.
That can happen because BC Assessment and a mortgage appraisal are completed for different purposes and may reflect different points in time. A higher assessment can be useful background information, but it does not require the lender or appraiser to use the same value for the mortgage.
Not dollar for dollar. Renovations can improve a property's value and marketability, but spending $50,000 does not automatically add $50,000 to the appraised value. The appraiser still looks at the local market, the type and quality of the improvements and how comparable properties have sold.
A low appraisal is a number to understand, not automatically a reason to panic.
Sometimes there is good reason to have the valuation reviewed. Sometimes the value is well supported and the better option is to adjust the financing. Either way, the useful question is what the lower value actually changes for your mortgage.
Related Pages and Tools
A lower appraisal can affect the mortgage amount, available equity or cash needed to complete a purchase. These pages can help with the next part of the plan.
Mortgage Tool
Compare different mortgage amounts and see how a change in financing could affect your payment.
Mortgage Tool
Estimate how much equity may be available and see how a lower property value could change the refinance.
Mortgage Minute
See why the property still needs to be approved even when the borrower was already pre-approved.
Mortgage Scenario
See what can change when you're buying your next home before the current one has sold, including the cash and financing pieces that need to line up.
Before You Change the Plan
Before you order another appraisal, move more money into the purchase or change lenders, I can help you recalculate the mortgage and work out which options are actually available.