An appraisal is a standard step in the home buying process and is used by lenders to determine the value of your home. This ensures that the loan amount matches the actual value of the property. If the appraised value is less than the purchase price, the buyer may have to come up with additional cash to cover the difference between the home’s actual value and the loan amount.
However, an appraised value that is higher than the asking price is almost always good news for buyers. A high home appraisal means the property is worth more than you’re paying for it, giving you equity before you even move in. Your loan terms won’t change or your down payment will be reduced, but you may benefit later when you refinance, remove private mortgage insurance (PMI), or sell.
Whether you’re buying a home in Asheville, North Carolina, or Austin, Texas, we’ll explain what happens if the appraised value is higher than the asking price.
Is it okay if the appraised amount is higher than the offered amount?
If the appraisal shows that the home is worth more than the purchase price, it usually means that comparable homes are selling for more, the home has unlisted upgrades, the market is rising rapidly, or the home is priced below market value.
However, if the appraisal value increases again, the buyer will also receive the following benefits:
1. Earn assets instantly
Equity is the difference between the value of your home and the amount you owe on it. If the appraised value is higher than the contract price, you begin home ownership with equity.
example:
Purchase price: $400,000 Appraised value: $420,000 Immediate capital: $20,000
This capital doesn’t change your loan structure, but it provides you with a stronger financial position even before you move in.
2. LTV is still based on purchase price
Even if the appraised value is higher, the lender will use the lower of the appraised value or the purchase price to calculate the loan-to-value ratio (LTV). A higher appraised value improves your LTV ratio because the loan amount is based on a lower purchase price rather than a higher property value.
3. You may be able to release PMI sooner
PMI costs won’t change immediately with a higher home appraised value, but starting with higher equity may help you reach the 20% equity threshold or 80% LTV ratio faster. Depending on your loan servicer, you may be able to eliminate PMI sooner than expected by refinancing and seeing your home’s value increase.
Will my down payment be reduced or my loan changed if the appraised value becomes higher?
No, a higher appraised value will not reduce your required down payment or change the terms of your mortgage. Lenders typically base loan amounts and down payments on the lower of the purchase price or appraised value.
If the appraised value is higher than the offered amount, the purchase price will be the lower number, so the loan amount, down payment percentage, and interest rate will remain the same. There is not necessarily additional borrowing capacity. The benefit of a higher valuation is manifested in additional capital, not in different financing terms.
Down payment: Calculated as a percentage of the contract price. Loan amount: The loan amount will be determined by the lowest of the purchase price or appraised value. Interest rate: Based on credit, loan program, and market, not appraised value.
A high appraisal just confirms that the home is worth at least more than you’re paying. Loan terms already agreed will not be changed.
If the appraised value of the home is higher than the asking price, can the seller back out?
Generally, the seller cannot cancel the sales contract just because the appraised value is too high. Once both buyer and seller agree on a purchase price and sign the contract, that price is usually fixed from a loan perspective.
A seller may withdraw after a high appraisal only if:
Buyer fails to fulfill contract terms and obligations. Seller-specific contingencies are included in the contract. Both buyer and seller agree to terminate the contract.
A high rating alone doesn’t give the seller the power to renegotiate the price or try other offers. In fact, it is rare for the seller to even know the appraisal results unless the item is returned for less than the asking price.
Are there any disadvantages to receiving an appraisal that is higher than the offered amount?
While a higher rating is usually good news for buyers, there are some situations where there may be some drawbacks or minor issues.
1. Seller may feel the price of the home is too low
If the appraised value is high, some sellers may be cautious in determining the price. While this report shouldn’t change your contract, it could give you less flexibility when requesting repairs or negotiating if the seller realizes the difference in value and thinks you’re leaving money behind.
2. Your down payment and monthly payments will not be reduced.
Even if your home is worth more, lenders will base their loan decisions on the lower of the purchase price or appraised value. Therefore, the required down payment and mortgage payments do not decrease, but remain the same.
3. You can shape your property tax expectations.
Property taxes are based on county assessed value and can increase over time in high demand markets or markets where prices increase quickly. In some cases, multiple homes being assessed above list value can also trigger a higher tax adjustment. On the other hand, if the purchase price of your home is reduced because needed repairs were not reflected in the appraised value, future tax assessments may not accurately reflect the value of your home.
4. It can change the dynamics of negotiation.
If the home’s appraisal significantly exceeds your offer, the seller may feel like they’ve already offered a deal. Appraisals are usually done after repair negotiations, although this can make further negotiations difficult.
5. There is no guarantee of future value.
High valuations reflect current markets but are no guarantee of future values. Because the housing market can go up and down over time, homes are often viewed as a long-term investment.
conclusion
In any housing market, starting the homeownership journey with additional equity can be a bonus for buyers without any additional effort or fees. Your loan terms and down payment will remain the same, but you can take pride in knowing you’re buying a new home for less than current market value.
Frequently Asked Questions: What happens if the appraised value is higher than the offer?
Is it okay if the appraised amount is higher than the offered amount?
yes. A higher appraisal means the home is worth more than the agreed upon price, giving the buyer instant equity. The terms of the loan remain unchanged, but the buyer’s financial position is strengthened and can support future goals such as refinancing or eliminating PMI.
Will the bank be able to loan me more than the appraised value?
The lender will base the loan amount on the lower of the purchase price or appraised value. Even if the appraised value is high, the lender will not increase the loan amount accordingly. The loan will be maintained based on the contract price. If the appraisal is low, the lender may reduce the loan amount by the value of the home rather than the purchase price.
Can the appraisal harm the seller?
Unlike a low rating, which can require the seller to lower the price or compromise terms, a high rating does not hurt the seller. The only potential downside of a high appraisal for the seller is that it may mean the home was priced below market value, but it does not affect the signed contract.
If the appraised value is higher than the asking price, can the seller decline the offer?
Generally, the seller cannot cancel the contract just because the appraised value is high. Once a sales contract is signed, the price is typically fixed unless the contract includes a seller-specific contingency, a price reduction is offered during repair negotiations, or both parties agree to end the transaction.
