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Appraisal Impact on Financing
April 7, 2025 | Posted by: Christopher Chanakos
Low Appraisals and Their Impact on Financing: How to Protect Your Transaction
In recent times, appraisals have become increasingly unpredictable, with many coming in lower than anticipated. This trend can significantly affect your plans, whether you're buying or refinancing a property. Understanding how to navigate these challenges early on is crucial to avoiding potential setbacks.
Why Appraisals Matter Early in the Process
Given the current market conditions, it is wise to conduct an appraisal as early as possible. Delaying this step can increase the risk of complications later in the transaction. The sooner an appraisal is completed, the more time you’ll have to address any discrepancies before finalizing the deal.
In many Canadian markets, home sale prices often exceed what recent comparable sales support. This is particularly common in areas where bidding wars are inflating offer prices beyond what lenders consider “fair market value.”
However, it’s important to remember that lenders focus on an independent appraiser’s assessment of the property’s value, rather than the price a buyer is willing to pay. If the appraisal value comes in lower than expected, this creates a financing gap. If the buyer is unable to cover the shortfall, the deal may fall apart.
Building Time for Financing Conditions When Buying
For those purchasing a property, it’s recommended to include a five-day financing condition in the offer. This time frame is essential for more than just securing lender approval—it also allows for the completion of the appraisal before committing to any conditions. If the appraisal value doesn’t align with the purchase price, this window provides the opportunity to reassess options without being legally bound to the original agreement.
While some buyers may feel pressure to submit firm offers, offering without financing conditions can be risky, especially when appraisals are coming in lower than expected. However, if the buyer has sufficient funds and is comfortable with the potential for a low appraisal, they may choose to waive conditions.
Refinancing and the Importance of Ordering Appraisals Early
If you’re refinancing, you may come across the term Automated Valuation Model (AVM). An AVM is a computer-based system that estimates the market value of a property using data such as recent sales, tax assessments, and price trends. AVMs are particularly useful for low-ratio mortgage applications as they are fast, cost-effective, and can be used to manage lender risk.
However, AVMs have limitations. They may miss certain property features or fail to accurately assess properties in rural or fluctuating markets due to limited sales data. Although AVMs can be helpful, many lenders still require a full appraisal, especially when the loan-to-value ratio is high or when there is uncertainty in the AVM result.
Private Lenders and Full Appraisals
When dealing with private lenders, AVMs are generally not used, and a full appraisal is required. This can lead to complications if the appraisal comes in lower than anticipated, as it may affect the loan amount or terms.
In some cases, a private lender may issue an approval based on preliminary information, but the final approval is contingent on the appraisal. If the appraisal is lower than expected, the lender may reduce the loan amount or alter the terms, making the deal less favorable or unworkable.
To mitigate this risk, it’s beneficial to order the appraisal upfront. While private lenders often work with specific appraisers, choosing one early from the lender’s approved list can help avoid surprises and ensure the process stays on track.
Advantages of Early Appraisals
Ordering an appraisal early helps you:
- Avoid last-minute surprises and financing shortfalls
- Stay on schedule for closing
- Increase confidence that the approval will hold
- Avoid scrambling to find new financing or renegotiating terms
Conclusion
Whether you’re buying or refinancing, ordering an appraisal early is one of the most prudent steps you can take to avoid delays and unexpected complications. If you’re purchasing a property, ensure you include a five-day financing condition to give yourself time to address potential issues with the appraisal. If refinancing, particularly with a private lender, securing the appraisal early can help you stay ahead of the curve and ensure a smooth process.
Being proactive and prepared in today’s unpredictable market is essential for avoiding surprises that could derail your transaction. I can help guide you through the process and ensure everything moves forward without unnecessary obstacles.