A small number of for-sale listings in many U.S. housing markets is contributing to appraisal problems for some home buyers.
Bidding wars between eager buyers have become the norm over the past couple of years in markets with limited inventory, real-estate agents say.
That’s one reason that 13% of existing homes on average sold for more than the asking price during the first 10 months of the year, according to the National Association of Realitors.
In the process, however, buyers could find that they are essentially offering to pay more than a house is actually worth. That’s a reality that may—or may not—become evident in the process of getting a home loan.
Many buyers get pre-qualified or pre-approved for a mortgage before they start shopping for a home. With a pre-approval, that mortgage amount is largely based on their credit history, income and debt load. Armed with this figure, buyers know how high they can bid to still be able to get financing for a property.
But that’s only part of the equation in the mortgage underwriting process.
After the buyer’s offer is accepted by the seller, the lender will order an appraisal. Banks in most cases will lend up to 80% to 90% of the appraised value of the home. (Some mortgages, like those insured by the Federal Housing Administration, a government agency, allow banks to lend nearly the entire appraised value.)
If the appraisal comes in below the agreed-upon purchase price, the buyer will have to make some tough decisions.
The buyer may ask the seller to agree to a revised, lower purchase price that’s in line with the appraised value. If the seller declines, the buyer will either have to walk away from the deal or put extra cash down to make up the difference between the appraised value and the purchase price.
In such cases, buyers will also have to accept that they’re overpaying based on the current market value of the property. It’s possible that the value will rise during the time period that they own the home. But it could also decline.