When the appraisal comes in low

Your lender does not lend against what you agreed to pay. They lend against what their appraiser says the property is worth. When those two numbers disagree, the gap is yours to cover in cash.

If you agreed to $900,000 and the appraisal comes in at $870,000, the lender works from $870,000. On an 80% mortgage the lender advances 80% of $870,000 instead of 80% of $900,000, so you are about $24,000 further out of pocket on closing day.

Why it happens

Most often in a fast-moving market, where sales are climbing faster than the closed comparables an appraiser is allowed to use. It also happens on properties with few true comparables, on unusual homes, and after a competitive multiple-offer sale where the winning price ran ahead of the neighbourhood.

Your options

• Cover the gap in cash. Straightforward if you have it. Check what it does to your closing costs and your reserves before you commit.
• Increase your down payment from elsewhere. Same effect, different source. A gift, an RRSP withdrawal under the Home Buyers' Plan, a shift in what you were holding back for renovations.
• Challenge the appraisal. Sometimes worth it, and only with evidence. Comparables the appraiser did not use, a correction to square footage, finished space that was not counted. Your mortgage broker submits it; this is not a phone call you make.
• Go to a different lender. Different lenders use different appraisers and have different tolerances. This takes time you may not have, which is why financing conditions exist.
• Renegotiate with the seller. Possible, and easier when the market has cooled since you signed. Harder when you won in competition, because the seller has other people's numbers on their desk.

How to avoid the surprise

Keep a real financing condition, especially on an unusual property or after a heated multiple-offer situation. Waiving financing on the assumption that a pre-approval covers you is the single most expensive misunderstanding I see.

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Written by Mike Elsey, Broker, Royal LePage Real Estate Associates, Brokerage. General information about the process in Ontario, not legal, financial, tax, insurance or inspection advice.