What Happens If the Appraisal Is Higher Than the Purchase Price?

Benefits of a Higher Home Appraisal for Buyers

It's good news that the property's appraised value is higher than the agreed-upon price. A high home appraisal offers several significant advantages for buyers, such as:

• Reassurance about the purchase price: An appraisal that is above the purchase price can give you confidence that you’re not paying more than the appraiser’s opinion of market value
• Avoiding a low-appraisal financing issue: You won't face the appraisal-gap problem that can occur when an appraisal comes in below the purchase price. This gap exists because the loan-to-value ratio changes when the home’s appraised value is less than what you are paying for it, which might change how much can be borrowed.
• Potentially higher equity: If the home appraises for more than you are paying for it, this could suggest you have a favorable equity position. That gap may represent extra equity, provided the appraisal accurately reflects the home's value. However, remember that values fluctuate, so there is no guarantee that will be the case over time.

Does a Higher Appraisal Mean Instant Equity?

If a home appraisal shows the home's value is higher than the amount you are paying, many people assume that this means they have instant equity. Since home equity is the difference between what you owe and what the home is worth, this is a natural assumption.

However, you can't necessarily assume that the entire difference is immediately available as usable equity or that it will automatically change your mortgage terms since lenders and loan programs usually require the use of the lesser of the appraised value or the purchase price in a loan transaction. The appraised value is just one opinion at a specific time, and many factors will affect what your home is worth over the long term.

Drawbacks of a Higher Home Appraisal for Buyers

While a low appraisal has significant drawbacks and can affect your loan terms, there are no significant downsides of a high home appraisal. Still, there are some minor drawbacks, including the following:

• It generally doesn’t increase your borrowing power: Lenders will typically calculate your loan-to-value ratio using the lower of the appraised value or the purchase price. This means a higher appraisal usually won’t make it possible to qualify for a higher loan amount.
• It doesn’t automatically change other mortgage costs or terms: A higher appraisal won’t necessarily change other loan terms. Lenders don't just lower your interest rates just because your estimated home value is higher. And whether you need private mortgage insurance or not is also determined based on applicable loan-to-value requirements, not based solely on the home appraisal.
• It doesn’t guarantee future value: An appraisal reflects the home's value at the particular point in time when the assessment is completed. It is not a guarantee of future value.
• Potential seller concerns: A seller who learns that the appraisal came in above the purchase price may feel they could have received more for the property, but the existing purchase agreement usually holds, so they can’t typically change the outcome.

What to Do If the Appraisal Comes Back Higher Than Your Offer

If the appraisal exceeds the purchase price, there is generally nothing that you need to do. This is very different from when your appraisal comes in low, and there is an appraisal gap.

When your appraisal comes in higher than the amount you are paying, you'll simply review the appraisal for accuracy and work with your real estate agent and mortgage lender to complete the necessary requirements for closing.

If you have questions during this time, you can ask your lender or agent.

What High Home Appraisals Mean for Sellers

When you are selling a house, you are typically bound by the terms of the purchase agreement once you have accepted a buyer's offer.

This means that you generally can’t change the sale price even if an appraisal comes in higher than expected, unless your agreement includes a clause allowing you to do that. This type of clause isn’t very common.

High Purchase Appraisal FAQs

If you still need to know more, here are the answers to frequently asked questions about a high purchase appraisal.

What If an FHA Appraisal Is Higher Than the Purchase Price?

FHA loan requirements typically include a completed home appraisal to show the home can serve as sufficient collateral for the loan. If an FHA appraisal is higher than the purchase price, the home meets the appraisal requirement, and you can move forward to closing once all conditions are satisfied.

Your loan is based on the lower of the purchase price or appraisal, so your loan terms won't change.

Is It Good If an Appraisal Is Higher Than the Purchase Price?

It can be good news if the appraisal is higher than the purchase price, as you will not have the problems created by an appraisal gap when the home's value comes in too low.

Your loan terms typically will not change, and the higher value is not a guarantee of instant equity. However, it does mean that at this point in time, the appraiser thinks the home is worth more than you're paying.

Can a Seller Negotiate After a High Appraisal?

A seller often cannot negotiate after a high appraisal. If the purchase and sale agreement has been signed and the price agreed upon, the seller cannot just change the price unless the contract includes an uncommon clause allowing a modification.

Is It Common for Appraisals to Come in High?

Appraisals sometimes come in high when home values are rising quickly in an area. However, you can’t count on this occurring even in a competitive market.

Final Thoughts: Understanding High Purchase Appraisals

A purchase appraisal is an important part of the homebuying process. When your appraisal comes in high, that is a good sign. It means your home's value is enough to serve as collateral, and the appraisal will not be an obstacle that affects closing on your loan.

To find out more about how an appraisal affects a home purchase and to get help finding the right mortgage loan for you, reach out to Freedom Mortgage today.