Getting your mortgage application denied due to a failed appraisal can be frustrating. After all, you found the perfect home at a price you can afford. So what went wrong?
When applying for a conventional loan, the property must pass an appraisal inspection. The appraiser verifies the home is worth at least the amount you want to borrow. Unfortunately, several issues can make a home fail this inspection.
Why Appraisals Matter
Lenders require appraisals to protect their investment They want assurance they can recoup their loan amount if you default Appraisals also protect buyers from overpaying.
The appraisal process compares similar homes recently sold in your area. This helps determine your property’s true market value If the home appraises under your contract price, the lender won’t finance the full amount
7 Reasons for a Failed Appraisal
While most properties easily pass inspection, here are some common issues that cause a conventional loan appraisal to fail
1. Major Repairs Are Needed
Properties must meet minimum safety and soundness standards. Obvious issues like a crumbling foundation, faulty plumbing or wiring, or a severely damaged roof will likely cause a failed appraisal. Lenders don’t want to assume liability for dangerous homes.
2. Unauthorized Renovations
Any renovations or additions made without proper permits can jeopardize the appraisal. Appraisers must note unpermitted work and evaluate its impact on market value.
3. Wood-Destroying Insects
Evidence of termites or other wood-boring insects is problematic. Lenders will require a pest inspection report stating the property is free of infestation before approving financing. Treatment and repairs may be necessary.
4. Moisture Intrusion
Signs of water intrusion, dampness, or mold due to flooding, roof leaks, or plumbing issues can result in appraisal failure. Excess moisture promotes decay and compromises structural integrity. No lender wants to finance a home with potential water damage.
5. Foundation or Settlement Issues
Cracks in walls, separation of walls from ceilings, sloping floors, and sticking doors can indicate foundation problems. If the appraiser suspects abnormal settlement, engineers are called in for evaluation. Costly foundation repairs may be mandated before closing.
6. Hazardous Materials
Homes with lead paint, asbestos, buried oil tanks, or other environmental hazards often don’t qualify for financing before remediation. Testing and removal of toxic materials must be done to pass appraisal.
7. Non-Conforming Additions
Room additions that violate zoning rules or exceed size limits for the neighborhood may negatively impact appraised value. For instance, a giant addition that overwhelms a small lot makes the home less marketable.
What if Your Home Fails?
Don’t panic if your appraisal comes back low. There are solutions for salvaging the deal. Here are some options:
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Appeal the appraisal – Provide evidence if you believe the valuation is inaccurate. Nearby home sales can bolster your case
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Ask the seller to lower the price – Offering less than the initial contract amount can bring the deal in line with appraised value
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Pay the difference in cash – Make up the gap between contract price and appraisal with a larger down payment
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Complete required repairs – Make fixes mandated by the appraiser and get reassessed
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Switch lenders – Check if another lender would approve based on a new appraisal
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Cancel contingency – In hot markets, buyers may waive appraisal objections to keep the home
Tips for Passing Your Appraisal
While there’s no guarantee, you can boost your odds of appraisal success:
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Check permits – Ensure all renovations were properly permitted
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Hire inspections – Inspect foundation, roof, structure, and systems prior to appraisal
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Cure defects – Complete repairs before the appraiser visits
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Clean and declutter – A tidy home shows better
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Add curb appeal – Focus on landscaping and exterior maintenance
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Highlight upgrades – Mention improvements you’ve made to the home
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Be there during inspection – You can point out home features and address concerns
Don’t Lose Hope!
A failed appraisal doesn’t automatically kill the deal. Work with your agent and lender to explore solutions. Many buyers successfully work through low appraisals and go on to close on their dream home.
Conventional vs government loan requirements
Below we describe home condition requirements for conforming mortgage loans.
Remember, ‘conforming loans’ are a type of conventional mortgage that follow guidelines set by Fannie Mae and Freddie Mac. These loan programs are not backed by the federal government.
Government loan programs, including FHA loans, VA loans, and USDA loans, enforce their own home condition requirements.
In addition, rules for non-conforming conventional mortgages — like a jumbo loan — may be slightly different.
But the following home requirements will apply to the majority of conventional mortgages.
Conventional loan appraisal requirements
One of the main requirements for a conventional loan is that the home must be appraised. The appraiser’s job is to work out the property’s actual market value.
Usually, they do this by comparing the property with other, similar homes in the neighborhood that have sold recently.
An appraiser’s principal task is to protect the lender by making sure they’re not financing more than the home is worth. But in doing so, the appraiser protects the buyer, too.
Sellers can set asking prices at any level they want. And many ask for more than the home is truly worth on the open market.
So the appraised value protects you from paying too much for a home. And it protects the lender by assuring that it could make its money back by selling the home in the event of a foreclosure.
This protection is the reason your mortgage lender will always require an appraisal for a conventional loan.
Over the years, an experienced appraiser might acquire some knowledge of construction techniques and structural issues. If they spot a major issue with the home, they may list it in their report.
In this case, your lender might require a specialist to check out that issue. For instance, chipping paint on the exterior of an older home might trigger a note from the appraiser that area should be checked out by a lead paint specialist.
But it’s not the appraiser’s job to explore such flaw or even necessarily to report them. Their only role is to appraise the home’s value.
This means buyers should not rely on an appraiser to notice structural problems or any other defects with the home. For their own peace of mind, buyers should order an independent, third-party home inspection to make sure they’re not purchasing a surprise fixer-upper.
What’s the difference between a FHA and conventional appraisal?
FAQ
What does a conventional loan appraiser look for?
What could go wrong with a home appraisal?
Does appraisal matter with conventional?
What type of inspection is required for a conventional loan?
What causes a conventional loan appraisal to be subject to?
Other deficiencies that affect the safety, soundness, or structural integrity of the property can cause a conventional loan appraisal to be “subject to”. In some cases, if an appraiser notes that there is an active roof leak, curled or cupped shingles, the appraisal will require a qualified professional to inspect the roof.
What is the difference between FHA & conventional appraisals?
FHA is more specific about property requirements. For FHA loans, homes must adhere to Minimum Property Requirements (MPRs) set by the Department of Housing and Urban Development, or HUD. FHA appraisers are trained to spot MPR deficiencies. Conventional loan appraisers do not have to hold a property to HUD’s exact standards.
What does a conventional loan appraiser check?
For conventional loans, lenders expect the appraiser to check the following: An appraisal is not the same as a home inspection. An appraisal determines value. An inspection determines condition. One snag that sometimes comes up during conventional (and other) loan appraisals is the “subject to” flag.
Are FHA appraisals hard to pass?
FHA appraisers are trained to spot MPR deficiencies. Conventional loan appraisers do not have to hold a property to HUD’s exact standards. Additionally, FHA maintains a list of approved appraisers. Conventional lenders can use just about any licensed appraiser, though. This is why FHA appraisals are perceived to be tougher to pass.