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Low Home Appraisal in Los Angeles? Here's What To Do

Q: What is an appraisal gap, and why does it frequently occur in Los Angeles?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: What are my main options if a home appraisal comes in lower than my offer?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: How can I successfully renegotiate the sale price after a low appraisal?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: What is a 'Reconsideration of Value' and what do I need to challenge an appraisal?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: How does a low appraisal affect my down payment and the total cash I need to close?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: How do FHA loans protect buyers from appraisal gaps differently than conventional loans?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: What is an appraisal contingency, and what are the risks of waiving it?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

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TL;DR

A low appraisal creates a gap between the home’s value and the sale price, which is a difference that lenders will not finance.
You have several options if an appraisal is low, including renegotiating with the seller, paying the difference in cash, or challenging the appraisal report.
An appraisal contingency in your purchase offer is a critical safeguard that allows you to walk away from the deal without penalty if the valuation is too low.

What exactly is an appraisal gap and why does it happen in Los Angeles?

An appraisal gap occurs when the professional valuation of a home comes in lower than the price you agreed to pay for it. Lenders will only finance a loan based on the appraised value or the purchase price, whichever is lower. The difference between your offer and the appraised value is the 'appraisal gap', and the lender expects you to cover this amount out of pocket.

In competitive real estate markets like Los Angeles and Santa Monica, appraisal gaps are common. This is typically driven by a few key factors:

Bidding Wars: High buyer demand and low housing inventory often lead to bidding wars. Buyers offer well above the asking price to secure a property, and sometimes these offers outpace the recent comparable sales (comps) that appraisers use for valuation.
Rapidly Rising Prices: When home prices increase quickly, the most recent closed sales that an appraiser relies on might not fully reflect the current market's momentum. An appraiser's job is to determine a property's value based on historical data, not future potential.
Unique Properties: Homes with unusual features or in niche neighborhoods might have fewer direct comps, making the valuation more subjective and potentially leading to a conservative appraisal.

A Real-World Example in Los Angeles

Let's say you're under contract for a home in Los Angeles for $950,000. You plan to make a 20% down payment. The lender orders an appraisal to confirm the home's value, but the appraiser determines it's only worth $920,000.

Purchase Price: $950,000
Appraised Value: $920,000
Appraisal Gap: $30,000

The lender will now only approve a loan based on the $920,000 value. You are now responsible for covering that $30,000 gap in cash, in addition to your original down payment.

A modern Los Angeles home with a swimming pool, illustrating a high-value property.

What are my immediate options if the appraisal comes in low?

Receiving the news of a low appraisal can feel like a setback, but it doesn't automatically mean the deal is dead. You have several strategic options to consider, and the best path forward depends on your finances, your contract, and the seller's willingness to cooperate.

Pay the Difference in Cash: If you have the additional funds available, the most straightforward solution is to cover the appraisal gap yourself. Using the example above, you would bring the $30,000 gap to closing along with your down payment and closing costs.
Renegotiate the Purchase Price: A low appraisal gives you powerful leverage. You can go back to the seller and ask them to lower the sale price to match the appraised value of $920,000.
Meet in the Middle: A common outcome is a compromise. You might offer to cover part of the gap if the seller agrees to reduce the price by the remaining amount. For instance, you could pay $15,000 and the seller could lower the price by $15,000, resulting in a new sale price of $935,000.
Challenge the Appraisal: If you believe the appraiser made errors or overlooked important information, you can request a 'Reconsideration of Value' (ROV). This is a formal process and requires strong evidence.
Cancel the Contract: If your purchase agreement includes an appraisal contingency, you have the right to walk away from the deal and have your earnest money deposit returned. This is your ultimate safety net.

Can I renegotiate the purchase price with the seller?

Yes, and this is often the most successful strategy. A low appraisal isn't just your problem; it's the seller's problem too. If your deal falls through, the seller has to put the house back on the market. More importantly, if the next buyer is also using a mortgage, they will likely run into the same appraisal issue.

Your real estate agent will be crucial in this negotiation. The conversation isn't about what you want to pay, but about what the property is verifiably worth to a lender.

How to Approach the Negotiation

Present the Appraisal Report: Share the official report with the seller and their agent. This isn't an opinion; it's a data-backed valuation from a licensed professional.
Frame it as a Shared Problem: Approach the seller collaboratively. Explain that the appraisal value will likely be a hurdle for any financed offer, not just yours.
Propose a Clear Solution: Don't just ask them to 'fix it'. Propose a specific new price or a split of the difference. For example: 'The home appraised for $30,000 less than our offer. To keep this deal on track, we are asking for a price reduction to $920,000. Alternatively, we can bring an additional $15,000 if you agree to a new price of $935,000.'

Sellers who are motivated to close quickly are often willing to negotiate to avoid the delay and uncertainty of finding a new buyer.

How can I challenge a low home appraisal from the lender?

Challenging an appraisal is possible, but it requires solid evidence and a formal process. You can't simply say you disagree with the value. You must prove the appraiser made a mistake. This process is known as a Reconsideration of Value (ROV).

A person reviewing financial documents, representing the appraisal challenge process.

Steps for a Reconsideration of Value

Obtain and Review the Report: Your lender will provide you with a copy of the appraisal report. Scrutinize it for any factual inaccuracies, no matter how small. Check the square footage, bedroom/bathroom count, lot size, and listed amenities.
Identify Factual Errors: If you find a clear error, such as the report listing 3 bedrooms when the house has 4, this is the strongest basis for an appeal.
Find Better 'Comps': The core of an appraisal is the 'comparable sales' or comps. These are recent sales of similar nearby homes. If your agent can find more relevant comps that the appraiser missed (e.g., a closer, more recent, or more similar sale at a higher price), this can be used as evidence.
Document Unrecognized Value: Did the appraiser overlook a recent major renovation, a premium view, or superior construction quality that wasn't reflected in the valuation? Provide documentation like receipts or permits.
Submit Through Your Lender: Your mortgage lender must submit the ROV request on your behalf. You and your agent will package the evidence into a clear, concise appeal letter.

It's important to have realistic expectations. Lenders and appraisers are more likely to correct factual errors than to reconsider subjective judgments about a home's condition or appeal. (The data, information, or policy mentioned here may vary over time.)

Does a low appraisal affect my down payment and closing costs?

A low appraisal directly impacts the total cash you need to close, but it can be confusing. The key is to remember that your loan amount and down payment are now calculated based on the lower appraised value.

Let's go back to our Santa Monica home purchase example:

Original Purchase Price: $950,000
Appraised Value: $920,000
Appraisal Gap: $30,000
Planned Down Payment: 20%

The lender will base your loan on the $920,000 value.

New Down Payment Calculation: 20% of $920,000 = $184,000
New Loan Amount: 80% of $920,000 = $736,000

To close the deal, you must bring:

Your down payment: $184,000
The appraisal gap: $30,000
Total Cash Needed (before closing costs): $184,000 + $30,000 = $214,000

So while your technical 'down payment' is based on the new, lower value, you still have to cover the gap with cash, increasing your total out-of-pocket expense significantly. Closing costs that are calculated as a percentage of the loan amount may decrease slightly because the final loan is smaller. (The data, information, or policy mentioned here may vary over time.)

How do FHA home loans handle appraisal gaps differently than conventional?

FHA loans, which are insured by the Federal Housing Administration, have specific appraisal rules that offer more protection to buyers compared to conventional loans.

The FHA Amendatory Clause

All FHA purchase contracts must include the FHA Amendatory Clause. This clause states that the buyer is not legally obligated to complete the purchase if the home does not appraise for the agreed-upon price. It essentially functions as a built-in appraisal contingency, allowing the buyer to cancel the contract and receive a full refund of their earnest money.

The FHA Appraisal Stays with the Property

This is a critical difference. When an FHA appraisal is completed, its valuation is tied to the property's FHA case number for 120 days. This means any other buyer seeking an FHA loan on that same property within that timeframe will have to use the same appraised value. This gives sellers a massive incentive to renegotiate with the current FHA buyer. If they don't, they will face the exact same problem with the next FHA buyer who comes along. (The data, information, or policy mentioned here may vary over time.)

In contrast, a conventional loan appraisal is 'owned' by the lender who ordered it and is not automatically transferred to a new buyer or lender.

What is an appraisal contingency and should I have one in Santa Monica?

An appraisal contingency is a clause in your real estate purchase offer that makes the deal conditional on the property appraising for at least the purchase price. If the appraisal comes in low, this contingency gives you the legal right to:

Terminate the contract without penalty.
Have your earnest money deposit returned in full.

In a balanced market, an appraisal contingency is a standard and wise protection for any buyer. However, in hyper-competitive markets like Santa Monica, sellers often receive multiple offers. They are more likely to favor offers that have been 'de-risked' by waiving contingencies. An offer without an appraisal contingency is stronger because it assures the seller that the deal won't fall apart due to a low valuation.

The Risk vs. Reward of Waiving the Contingency

Reward: Waiving the contingency can make your offer significantly more attractive and could be the deciding factor that gets your offer accepted.
Risk: If you waive the contingency and the appraisal comes in low, you cannot back out without losing your earnest money deposit, which can be tens of thousands of dollars. You are contractually obligated to cover the appraisal gap or forfeit your deposit.

Before waiving this crucial protection, you must have a frank discussion with your real estate agent and lender. You need to be confident in your financial ability to cover a potential gap and understand the risks involved.

Navigating a complex purchase in Los Angeles or Santa Monica can be challenging, but an appraisal gap doesn't have to be a dead end. A strategic mortgage plan is key to moving forward. Take the first step towards a clear solution and apply now to see what your options are.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.