The Canadian housing market is cooling off, causing home prices to fall from the record highs experienced during Covid. With prices falling, some homebuyers’ mortgage appraisals are coming up short of the actual purchase price, affecting the amount of financing they can receive.
Because lenders offer mortgage loans based on a home’s appraised value and not the purchase price, appraisals that come up short mean that you qualify for less mortgage!
In this blog, we’ll dive into what an appraisal coming up short could mean for you and how you can prepare and protect yourself if it does happen. Keep scrolling to learn:
- Why appraisals are coming up short
- What happens if you can’t make up the difference between the purchase price and appraisal
- Options to consider when your appraisal comes up short
- How to protect yourself
Let’s get started!
Why Appraisals Are Coming Back Short
During Covid, the housing market in Canada was extremely hot, and home prices were highly overvalued. Due to many factors, house prices are now falling back to reality, leading to some homeowners having their appraisals come back short (less than the home’s purchase price).
How Appraisals Coming Up Short Can Affect You
If your mortgage appraisal comes up short of the home’s purchase price, you will receive less mortgage. To make up for the difference, you will have to either:
- Pay a larger down payment
- Increase your loan to value (LTV) ratio.
Let’s look at an example for each of these scenarios:
- Larger down payment
You’ve agreed to purchase a home for $1,000,000 and will put down the required $200,000 (20%). However, the home’s appraisal for the mortgage came in at a value of $900,000. This means the lender will offer a mortgage of $720,000 (80% of the appraised value).
What this means: You would have to come up with an additional $80,000 for your down payment, for a total of $280,000.
- Increase your loan to value ratio
You purchase a home for $500,000 with a down payment of $100,000 and a mortgage of $400,000. The mortgage appraisal comes in at a value of $450,000.
What this means: You will still be approved, but the lender will adjust the LTV from 80% to 88.89%. A higher LTV can mean increased rates and if the LTV is more than 80%, you’ll need to qualify for an insured mortgage and pay the mortgage default insurance premium as well.
What If You Can’t Make Up The Difference?
As shown in the examples above, if the appraisal comes up short, you must make up the difference. If you make an offer on a home without the condition of financing approval weighing on the appraisal and you cannot make up the difference, you could face potentially significant financial consequences.
You will likely lose your initial deposit on a firm offer, and if the seller relists the home and receives lower offers than the one previously accepted from you, they could sue you for the difference.
So if you cannot make up the difference, it’s important to consult with a lawyer immediately to form a plan of action.
Options To Consider
As you can see, being unable to make up the difference when your appraisal comes up short can be quite costly. Luckily there are options available to you if this happens to avoid losing your deposit and potential lawsuits.
Let’s take a look at the potential options:
- Discuss with your broker about ordering a second appraisal (or third if needed) from a new appraiser for a more favourable evaluation
- Borrow money from family and friends
- Make up the difference with a gifted down payment from a family member
- If possible, switch to an insured mortgage to qualify on a higher LTV ratio
- If possible, switch the mortgage to an alternative option to increase your purchasing power and the total mortgage amount
- Bridge the gap with funds from a private lender
- Consult a lawyer immediately to look at other potential options
How to Protect Yourself
Now that we’ve covered the options available to help make up the difference if your appraisal comes up short, let’s look at how you can protect yourself to avoid the issue altogether:
- Get your appraisal done in short order after the Agreement of Purchase and Sale is signed to avoid swings in the market that could affect the home’s valuation.
- Talk to your realtor and an appraiser to get an estimate of the value before making an offer so you have a good idea of the appraisal value.
- Pay for a desktop appraisal to get a better idea of the property’s value before making an offer.
- Talk to your mortgage broker about using a lender with an APV (automated property value). An APV is an AI solution that provides an automatic appraisal based on the volume of sales data in the area – saving both you and the lender time and energy waiting on a full appraisal to come through.
- Work with a Pineapple broker, who will have a plan B and C for those who are entering the market or getting ready to close.
As you can see, there are plenty of ways to protect yourself, but the best way to ensure that you are protected is to work with an expert. At Pineapple, our brokers are just that. They will help walk you through all aspects of the home buying process and provide the guidance needed to avoid a situation where you can’t make up the difference if your appraisal comes up short.