You determined that you are qualified for the VA loan program. You find a house that meets your needs and falls within your budget, so you make an offer to buy it. Maybe there’s some back-and-forth negotiation, after which you and the seller agree on a purchase price.
But then the home appraiser comes along, evaluates the property, and determines that it’s worth less than the price you’ve agreed to pay. What do you do next? Is the whole deal ruined?
Maybe not. In this article, we’ll explore some of the options you have when the VA loan home appraisal is lower than the purchase price.
All VA Loans Require a Home Appraisal
VA loans are a kind of government-backed mortgage. You apply for the loan through a mortgage lender in the private sector, just as you would with a conventional or “regular” loan. The difference is that the federal government provides the lender with a partial guarantee, thereby reducing their risk.
This added layer of protection allows mortgage lenders to be a bit more flexible when qualifying VA loan applicants. For example, borrowers can qualify for this program with no down payment, no mortgage insurance, and a less-than-perfect credit score.
But the home you are purchasing will have to be appraised by a VA-approved appraiser, to determine its current market value.
The appraiser will also evaluate the home to make sure that it meets the minimum property requirements for the VA loan program, which we have covered in a separate article.
To determine the market value, the appraiser will use tax records, recent sales data for the area, and other information relating to property prices. Ultimately, he or she will make an informed opinion as to how much the house is worth based on local market trends.
How It Relates to Mortgage Approval
When it comes to getting approved for a VA loan, home appraisals matter a lot. They can determine whether the loan proceeds toward closing, or stops in its tracks.
Mortgage lenders try to avoid scenarios where they are lending more than a particular property is worth. If the borrower defaults on the mortgage and the lender has to foreclose on the home, they want to be sure they can sell it for at least as much as they lent the borrower.
But it’s not just the lender who requires an appraisal for VA-backed loans. The U.S. Department of Veterans Affairs, which manages the program, also requires a comprehensive home appraisal.
Now that we’ve laid some groundwork, let’s revisit the question at hand. What can a home buyer do if the VA loan appraisal comes in lower than the purchase price?
When the Appraisal Is Lower Than the Purchase Price
When it comes to measuring the market value, a VA loan home appraisal can have one of two outcomes:
- The appraiser determines that the property value is equal to or greater than the amount the home buyer has agreed to pay. In this case, the appraisal should raise no red flags and the loan will move on to the next stage, which is underwriting.
- The appraiser determines that the property is worth less than the agreed-upon purchase price. This scenario can create speed bumps that slow the process down and require the home buyer to make some decisions.
So, what are your options in the second scenario, when the VA loan appraisal is lower than the purchase price?
In their guide to buying a home with a VA-backed mortgage loan, the Department of Veterans Affairs identifies three potential paths forward in a low appraisal scenario:
1. Request a Reconsideration of Value (ROV)
If the VA appraisal comes in lower than the purchase price, the borrower has the option to request a Reconsideration of Value. You might think of it as a kind of appeal process.
The borrower must submit a written request to the lender, along with any supporting documentation that they believe will justify a higher appraisal value (e.g., comparable sales data).
As it states on the VA.gov website:
“You can ask your real estate agent to provide the lender with valid sales data showing the property is worth more than its appraised price. The lender will ask the appraiser to reconsider based on this information.”
This is why it’s wise to work with a real estate agent who’s familiar with VA loans and property appraisals. Your agent will be able to help you gather supporting data that’s required for a Reconsideration of Value.
2. Renegotiate the Sales Price
When the VA home appraisal comes in lower than the purchase price, the buyer could also ask the seller to lower the price so that it matches the appraised home value. Whether or not the seller agrees will largely depend on current market conditions.
In a highly competitive market, where sellers receive multiple offers from buyers, they might be less likely to lower their price. But in a slower market, where the seller’s more motivated to make a deal, this might be a viable strategy for moving forward.
3. Pay the Difference in the Form of a Down Payment
The third option identified by the VA is for the home buyer to pay the difference between the appraised price and the purchase price, out of their own pocket. In this scenario, the borrower would pay extra money at closing in the form of a down payment.
There is a fourth option that the Department of Veterans Affairs did not mention, and that’s walking away from the deal. In some cases, a home buyer might not be able to find a clear path forward. So they might have to walk away from the transaction and find another home to purchase.
Walking away might be the only option if the following conditions are true:
- The VA loan appraisal comes in lower than the purchase price.
- The seller is unwilling to reduce the sale price to reflect the appraisal.
- The home buyer does not have enough money to cover the difference.
As a home buyer, the best thing you can do is identify a strategy for all possible scenarios. Talk it over with your real estate agent as well. Create a plan of action in case the VA home appraisal ends up being lower than the purchase price. And remember, there are other houses out there!