The appraisal and the lender decision are different
An appraisal provides a professional opinion or analysis concerning property value for an identified client and authorized use. The lender decides whether to accept the report, what lending value to use, whether the property fits policy, what LTV to permit and whether additional reports are required.
The appraisal does not compel the lender to advance a particular amount.
Purchase price, market value and lending value
Purchase price is the contractual amount agreed between buyer and seller.
Appraised market value is the appraiser’s opinion under the assignment assumptions.
Lender-accepted value is the value used for underwriting.
For a purchase, lenders commonly calculate LTV using the lower of the purchase price and accepted appraised value, subject to the program.
Common report types
Automated valuation model: an automated estimate using property and market data.
Desktop appraisal: completed without a site visit.
Drive-by appraisal: exterior inspection.
Full appraisal: interior and exterior inspection with property description, comparable analysis and value conclusion.
Market-rent report: estimate of rent for the property.
Progress inspection: reports construction-completion status for a draw.
Commercial appraisal: may analyze income capitalization, discounted cash flow, comparable sales, cost, leases, vacancy and highest and best use.
Client and reliance
The borrower may pay the fee without being the appraiser’s client or authorized user. For mortgage work, the lender commonly instructs the appraiser and controls reliance and release.
Do not assume an appraisal ordered for one lender can be transferred to another lender without authorization.
Comparable sales and condition
Comparable analysis can consider location, sale date, property type, lot, building size, condition, renovations, parking, basement, legal use and market conditions.
Renovation cost does not equal market value. Incomplete or unpermitted work can create a holdback, cost-to-complete requirement or decline.
Legal use, condominiums and rural property
A physical unit is not automatically a legally accepted rental unit. Zoning, permits, occupancy, fire compliance, municipal records and insurance may be relevant.
Condominium review can involve common expenses, special assessments, litigation, insurance, reserve fund, short-term rental rules, building condition and interim occupancy.
Rural review can involve well, septic, acreage, access, outbuildings, agricultural use, market depth, insurance and comparable scarcity.
Appraisal shortfall
Possible responses include increasing the down payment, renegotiating the price, reducing the loan, using equity from another property, providing objective reconsideration evidence, obtaining another lender-approved appraisal, using suitable secondary financing, extending closing or cancelling under a valid condition.
A second appraisal is not a guaranteed solution.
Purchase price: $1,250,000
Planned mortgage: $1,000,000
Planned down payment: $250,000
Appraised value: $1,150,000
Illustrative maximum LTV: 80%
Maximum mortgage = $1,150,000 × 80% = $920,000
Required cash toward price = $1,250,000 − $920,000 = $330,000
Additional cash required = $330,000 − $250,000 = $80,000
Reconsideration of value
A reconsideration request should provide objective evidence such as a more relevant comparable sale, incorrect property characteristic, missing renovation, incorrect lot or building size or another factual error. It should not pressure the appraiser to reach a required number.
A Mississauga preconstruction purchase faced an appraisal-related shortfall. Adding a private loan to the new property would have created a higher payment, additional fees and potential qualification problems. The file was instead structured with the same A lender providing a refinance on the existing property and the purchase mortgage on the new property.
The underwriting lesson: An appraisal shortfall should be analyzed across the borrower’s complete balance sheet rather than automatically adding the most expensive debt to the purchased property.
The most damaging shortfalls occur where financing was waived, the buyer has little liquidity, the deposit consumed most savings, the closing is imminent or secondary financing is unavailable or unaffordable.
If You Remember Only Three Things
1. The appraiser provides an opinion; the lender determines the accepted value and property eligibility.
2. Paying for an appraisal does not automatically give the borrower or another lender reliance rights.
3. A shortfall requires additional equity, renegotiation or restructuring; it does not alter the purchase contract by itself.