What To Do If A VA Appraisal Comes In Low

The VA appraisal process is one of the most important steps toward home ownership; some don’t understand the power of the appraisal to push the loan forward or stop it in its tracks if there are issues that need correcting (as a condition of loan approval) or whether the condition of the home renders it unsuitable for a VA mortgage.

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The VA Appraisal: What It Is And What It Is Not

It is very important to understand that the VA appraisal is NOT A HOME INSPECTION even in cases where the lender or other professionals misuse the term “inspection” when they really mean “appraisal.” Always remember that the appraisal is a tool designed for the LENDER and not the borrower.

The job of the appraisal is to insure the home meets minimum standards (nothing more) and to determine the fair market value of the property.

What The VA Appraisal Process Does

The VA appraisal process includes a review (not an inspection) of the home, and also a look at comparable properties in the area to see how the home measures up to similar houses in the market.

The appraiser will view the roof (from the ground-she is not required to step onto the roof which is one big reason why appraisals can never take the place of a proper home inspection), the attic, the basement where applicable, take a look at the mechanical systems in the home, etc.

The appraisal process includes a good amount of paperwork that the VA appraiser must complete and turn into the lender, who then takes the recommendations of the appraisal and applies them to the loan including the fair market value.

Appraisal Results

Sometimes the VA appraisal is lower than the asking price, and sometimes it is higher. The VA loan guaranty amount is based on whichever dollar amount is lower. That brings some important questions, the biggest of which is this:

What happens when a VA appraisal comes in lower than the asking price of the real estate?

When the appraisal is lower than the asking price, it essentially means that the lender does not place a value on the home as high as the seller.

In such cases the borrower is free to continue with the purchase loan transaction to buy the real estate, but the difference between the asking price and the appraisal would have to be paid by the borrower in cash at closing time and cannot be financed into the loan amount.

Does The Borrower Have To Complete The Sale If The Appraisal Comes In Low?

No. The VA loan program features an “escape clause” that permits the borrower to walk away from a home loan penalty-free in cases where the appraised value is lower than the asking price.

The VA and the lender cannot force the borrower to come up with the difference in cash to complete the transaction. The borrower cannot be financially penalized for doing so in these cases. Even if the purchase agreement does not specifically contain language providing the escape clause, it must either be added to the loan agreement or the VA commitment in this area must be honored regardless.

What To Do If The VA Appraisal Comes In Low

In cases where the VA appraisal comes in lower than the sale price, some borrowers may be tempted to request a second appraisal.

It is important to understand the appraisal process in such cases to know what you are specifically permitted to do; the appraisal process ends with the VA appraiser sending a Notice Of Value (NOV) to the lender. If the  NOV comes in low, there may or may not be some recourse depending on circumstances.

In general, it is not permitted to request another appraisal just because there is a difference of opinion over the NOV dollar amount. However, if there is information that should have been considered that could affect valuation, or if the appraisal was not done according to VA standards or other applicable guidelines, there may be justification for a new appraisal or a reconsideration of the NOV.

But you don’t have to ask for a new appraisal to get the NOV looked at again. According to the VA official site, “After a notice of value is issued, the value estimate or any NOV condition or requirement may be changed” in cases where the change is “clearly warranted and fully supported by real estate market or other valid information which would be considered adequate and reasonable by professional appraisal standards.”

You may also be able to request another look at the NOV in cases where “the NOV’s issuance involved fraud, misrepresentation or substantial VA or LAPP lender administrative error and action is necessary to make the valuation consistent with the real estate market.”

Is A Second VA Appraisal Possible?

VA loan rules in this area include the following instructions to the lender:

A new VA appraisal must not be requested for any property which already has a valid NOV.  However, an additional appraisal not assigned by VA can be used to support a request for an increase in value, provided the veteran purchaser was not required to pay any portion of the cost of that additional appraisal.”

Note that this portion of the rules makes a clear distinction between the NOV and the appraisal itself. Yes, you may be able to request a review of the Notice of Value, but requesting a new appraisal process once a valid NOV is in place is generally not permitted, as we see from the rule above.

Other Options

If the appraisal comes in low and does not require a reconsideration of value, the borrower is free to negotiate with the seller to get a price closer to the appraised value of the property. You can negotiate with the seller and see if there is any flexibility along those lines.

But some borrowers already have their minds made up that they want that specific property and are willing to pay the difference between the asking price and the appraised value of the home.

In such cases, the borrower is required to pay this at closing time as a condition of loan approval. The difference cannot be financed into the loan amount.

It should be noted that this payment is separate from any down payment you may wish to make or are required to make depending on circumstances. Some borrowers choose to make a down payment even on zero-down VA home loans because doing so reduces the amount of the required VA loan funding fee.

But paying the difference between the asking price and the appraised value of the home is technically not the same as a down payment. Remember, a down payment reduces the principal of the loan amount. The money you pay to make up the difference between the sale price and the NOV does not affect the principal amount of the loan.

You will need to consult with a participating VA lender to learn what kinds of payments in this area may or may not be technically permitted to be considered a down payment. VA loan guidelines are subject to change due to legislation, policy adjustments, and other variables.

That said, the VA Lender’s Handbook has statements in certain sections that seem to indicate that paying the difference between a Notice of Value and the sale price of the home**may** be considered a form of down payment, as evidenced by the following quote from Chapter 9 of the VA Lender’s Handbook discussing second mortgage procedures for a borrower who needs a second mortgage taken out at the same time the initial mortgage is applied for to cover certain closing costs.

“Proceeds of the second mortgage may be used for a variety of purposes, including but not limited to:

• closing costs, or
• a downpayment to meet secondary market requirements of the lender. But may not be used to cover any portion of a downpayment required by VA to cover the excess of the purchase price over VA’s reasonable value. (Emphasis ours)”

Whether this implies that paying the difference may be constituted as a down payment for the purposes of calculating the VA loan funding fee may require the borrower and lender to query the Department of Veterans Affairs as to the most current VA loan policy on this topic. You can contact the VA directly to ask questions about this issue and the most up-to-date policies by dialing 1-800-827-1000.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News