How Real Estate Appraisals Affect Mortgage Approval

6 July 2025

When buying a home, one of the most critical steps in the mortgage approval process is the real estate appraisal. While it may seem like just another hurdle, an appraisal can make or break your loan approval. But how exactly does it impact your mortgage? Let's dive deep into this essential aspect of home financing.

What Is a Real Estate Appraisal?

A real estate appraisal is an unbiased, professional evaluation of a property's fair market value. Lenders require it to ensure they’re not lending more money than the home is worth. Think of it as a financial checkpoint—a way to protect both the buyer and the lender from an overpriced deal.

Why Do Lenders Require an Appraisal?

Lenders aren’t in the business of taking unnecessary risks. If they approve a loan for a home that’s overpriced, they could be in trouble if the borrower defaults. The appraisal helps them determine:

- The actual market value of the property – to ensure it aligns with the loan amount.
- The loan-to-value ratio (LTV) – which affects loan terms and conditions.
- The risk involved in the mortgage – a lower appraisal means a riskier loan.

Without a proper appraisal, lenders would be flying blind when it comes to approving mortgages.

How Are Real Estate Appraisals Conducted?

A licensed appraiser evaluates the property based on several factors, including:

- Comparable Sales: Recent sale prices of similar homes in the area (also called "comps").
- Property Condition: The overall state of the home, both structurally and cosmetically.
- Location & Neighborhood: Proximity to schools, amenities, and market demand.
- Upgrades & Renovations: Any improvements that add value to the property.

The appraiser then compiles this data into an official appraisal report, which the lender uses to determine the loan amount.

How an Appraisal Can Impact Your Mortgage Approval

1. When the Appraisal Matches the Purchase Price

If the appraisal comes in at or above the agreed purchase price, congratulations! Your mortgage process continues smoothly, and you’re one step closer to closing on your dream home.

2. When the Appraisal Is Higher Than the Purchase Price

This is great news for buyers. If an appraisal comes in higher than what you're paying, it means you're getting instant equity in the home. The lender will still base the loan on the purchase price, but you’re in a strong position financially.

3. When the Appraisal Is Lower Than the Purchase Price

Here’s where things get tricky. If the appraisal is lower than the agreed purchase price, lenders typically won’t cover the full amount of the loan. This can cause three major problems:

- You May Need to Pay the Difference
Lenders base mortgages on the appraised value, not the purchase price. If the appraisal is lower, you’ll have to make up the gap with additional cash.

- The Seller May Need to Lower the Price
In some cases, sellers may agree to reduce the price to match the appraisal. However, this depends on market conditions and the seller’s willingness to negotiate.

- Your Loan Could Be Denied
If you can’t cover the difference and the seller won’t budge, your lender may deny the mortgage altogether.

How to Handle a Low Appraisal

A low appraisal doesn’t mean the end of the road. There are several ways to deal with it:

1. Request a Re-Evaluation

Sometimes, appraisals contain errors or outdated comps. You can provide additional comparable sales data to challenge the appraisal.

2. Negotiate With the Seller

If the appraisal comes in low, the seller might be willing to lower the price to keep the deal alive. It never hurts to ask!

3. Bring Additional Funds to Closing

If you truly love the home and can afford it, covering the difference out-of-pocket might be an option.

4. Look for a Different Lender

Some lenders may have different appraisal processes or use different appraisers. Shopping around could yield a better valuation.

The Role of the Appraisal in Refinancing

An appraisal isn't just important for home buyers—it plays a big role in refinancing, too. If you're looking to refinance, lenders require an appraisal to determine your home's current value. A higher appraisal can lower your loan-to-value ratio (LTV), which may qualify you for better refinancing terms, like a lower interest rate.

However, if your appraisal comes in low, refinancing could become difficult or even impossible. In some cases, lenders may require you to bring cash to the table to meet their equity requirements.

Ways to Improve Your Home’s Appraisal Value

Thinking about selling or refinancing? Here are some ways to boost your home’s value before an appraisal:

1. Boost Curb Appeal – First impressions matter. Keep your lawn well-maintained, add fresh paint, and repair any visible damage.
2. Make Small Upgrades – Modernizing kitchens and bathrooms (even with minor updates) can significantly impact value.
3. Fix Any Maintenance Issues – Leaky faucets, chipped paint, and broken tiles can raise red flags for appraisers.
4. Highlight Recent Improvements – Provide a list of upgrades (roof replacement, new HVAC, etc.) to prove added value.
5. Know the Comps in Your Area – Understanding recent sales in your neighborhood can help set realistic expectations.

Final Thoughts

A real estate appraisal is more than just an assessment—it’s a key factor in determining whether your mortgage gets approved. Whether you're buying, selling, or refinancing, understanding how appraisals work can help you prepare for potential pitfalls and make informed financial decisions.

If your appraisal comes in low, don’t panic. There are options available, from negotiating with the seller to challenging the appraisal. The key is to stay informed, work closely with your lender, and make sure you're financially ready for any outcome.

By understanding the role of appraisals in the mortgage approval process, you can navigate the complexities of real estate financing with confidence.