How Home Appraisals Work

Recovering From a Low Appraisal

Inflated home appraisals by Washington Mutual and other major lenders has been cited as a factor in the current housing crisis.
Inflated home appraisals by Washington Mutual and other major lenders has been cited as a factor in the current housing crisis.
Scott Olson/Getty Images

An appraisal of $249,000? The home seller learns that his $300,000 asking price is much higher than the actual property value. If you are the buyer, this figure means that the amount you can finance on the property is much lower than you expected. An appraisal value that is considerably lower than what you have offered should be a red light -- a warning that you may be paying too much for the property. So is the deal over? Is it time to panic and throw in the towel? Can anything be done?

First, take a look at what may have caused the low appraisal. It might be due to factors that the homeowner could correct, such as repairs or maintenance. If that's the case, the appraiser may be willing to take a second look and adjust the appraisal accordingly.

You always have the option to order a second appraisal. This may be a good idea if the first appraiser is inexperienced or unfamiliar with the area where the property is located. However, be sure to use an appraiser from a list recognized by the lending institution. It's possible that a second appraisal will uncover mistakes the first appraiser made. If you believe that an appraisal is simply not an accurate representation of the property's value, and the appraiser is not willing to listen to your concerns, you can go to your state's licensing agency for appraisers and file a complaint.

From the lender's standpoint, however, the mortgage transaction is at a standstill until something else happens. Perhaps the seller will lower the asking price or carry a second mortgage to make up the difference. Or, as the homebuyer, you may be willing to increase your cash down payment. It's possible that both buyer and seller can negotiate compromises that will satisfy the lender.

If, however, negotiations fall through and the appraisal is still too far below what the bank is willing to finance, then there's no choice but to cancel the transaction. You probably signed a purchasing contract stating your offer for the property, but it likely contains a loan contingency. This is a statement that allows you to cancel the contract and receive any deposit you paid the seller if you can't qualify to buy the property at the agreed terms.

A home appraisal is more than just another cost added to the buyer's bottom line. It's a protection for everyone involved in the home-buying process. It will help you make a more informed decision about purchasing a home.

For more information about home appraisals and other related topics, see the links on the following page.

Related HowStuffWorks Articles

More Great Links


  • American Society of Appraisers. "Consumer Smart: Appraisal Basics." (Accessed 5/7/08)
  • Appraisal Foundation. "What's it worth: A consumer's guide to appraisal and selecting an appraiser." (Accessed 5/8/08)
  • DeSilver, Drew. "WaMu accused of pushing appraisers to inflate values." Seattle Times. 11/2/07. (Accessed 5/7/08)
  • Gormley, Michael. "Cuomo: Appraisers inflated home values." USA TODAY 11/1/2007. (Accessed 5/7/08)
  • Illinois Business Law Journal. "Fannie Mae and Freddie Mac: Setting the Industry Standard." (Accessed 5/7/08)
  • Office of Federal Housing Enterprise Oversight. "OFHEO, NY Attorney General, Fannie Mae, Freddie Mac sign agreements to combat appraisal fraud." 3/3/08. (Accessed 5/8/08)
  • Real "How much is a home worth?" (Accessed 5/7/08)
  • Schroeder, Robert. "Fannie Mae, Freddie Mac in appraisal agreement." The Wall Street Journal: Market Watch. 3/3/08. (Accessed 5/7/08)
  • U.S. Department of Housing and Urban Development. "100 Questions & Answers About Buying a New Home." (Accessed 5/7/08)
  • Wilmington Trust. "Beware of high appraisals." (Accessed 5/8/08)