Everything You Need to Know About Bank Appraisals & What They Mean for Buyers

Bank appraisals are a crucial part of the home-buying process in Canada. When applying for a mortgage, the bank requires an independent assessment of the property's value to ensure that the loan amount you request aligns with the property's actual underlying worth.

This process helps protect both the lender and the borrower by ensuring that the property is valued accurately. This article will delve into how bank appraisals work, what to do if the appraisal comes in lower than expected, and how you can protect yourself from low appraisals.

How Does a Home Appraisals Work in Canada?

When a borrower is requesting a mortgage for a certain amount, the lender wants to ensure that they are not overlending. The bank appraisal process typically begins during the mortgage approval process when the potential lender orders an appraisal from a professional appraiser. The lender will send an appraiser who will visit the property and conduct a thorough inspection, taking into account a variety of factors such as the age and condition of the property, the size and layout of the home, the quality of finishes and materials, and the location and surrounding neighbourhood. They will also research recent sales of similar properties in the area to help determine the property's value. In real estate speak, this is called “pulling comps,” short for comparables.

In British Columbia, appraisers are governed by the BC chapter of the Appraisal Institute of Canada. Other similar provincial and territorial bodies exist throughout Canada. After completing the inspection, the appraiser will write a report detailing their findings and providing an estimated value for the property. This report is then reviewed by the lender, who will use it to help determine the maximum loan amount they are willing to offer. The lender will also consider other factors, such as the borrower's creditworthiness and debt-to-income ratio, when making their decision.

It’s important to note that the goal of a lender’s appraisal is not to value the home but to justify the amount the buyer has agreed to pay. The appraiser acts as an independent third party who assesses the value without bias. As such, appraisals will never value the property higher than the agreed-upon purchase price. A more pressing issue is a low bank appraisal. From the lender's view, if the sales price is much higher than what the market should support for a property like this, it puts the lender at risk. In the event of a default, they may not be able to recoup their loan as they will have to sell the property for less than expected. 

What Happens if the Bank Appraisal Comes in Low

So, you’ve received a low bank appraisal - what happens next? Well, if the bank appraisal comes in lower than the property's purchase price, it can be a cause for concern. The lender relies on the appraisal to determine how much they can safely loan to the borrower. This lender will only be willing to offer a loan up to the property's appraised value. 

Let’s say a buyer offers $1,200,000 for a home, but the bank’s appraiser thinks the house is only valued at $1,100,000. In this situation, the bank will only approve a loan for a home worth $1,100,000. If before you were going to receive a loan worth 80% of the house, your expected $960,000 mortgage is now only worth $880,000. This is a big gap, and if your deposit is now too low, you may no longer qualify for the loan.  

If the borrower still wants to move forward with the purchase, they will need to come up with the difference in cash or negotiate a lower purchase price with the seller. This is why most real estate contracts come with a subject related to securing financing. Typically, a buyer only wants to fully commit to a purchase once they are confident they will have the funds to make the purchase and afford the payments.

If the borrower is unable to come up with the additional funds or negotiate a lower price, they may need to consider other options, such as seeking a second opinion from another appraiser or finding a different lender who is willing to lend more. It's important to note that the lender is under no obligation to approve a loan for more than the property's appraised value. Below, we will look at what to do if your bank appraisal is low, and also discuss actions a borrower can take to avoid being surprised by a low appraisal in the first place.  

What to do if your Bank Appraisal Comes in Low

So, you’ve found your perfect home and feel close to securing the financing. Then - a shock, your appraisal comes in low! What can you do now?

1. Consider getting a second opinion: If you are concerned about the accuracy of the appraisal, you can consider getting a second opinion from another appraiser. Typically, most lenders will cover the appraisal fee (or build it into your mortgage payments). If you are seeking a new appraisal, it's essential to keep in mind that this will typically come with an additional fee and may not necessarily result in a different valuation.
2. Negotiate with the seller: If the appraisal comes in lower than the purchase price and you still want to move forward with the purchase, you can try negotiating a lower price with the seller. Be prepared to present the appraiser's report and any comparable sales data to support your case. This is only really possible in a buyer’s market where there is not an immense amount of competition for homes. If you are one of many potential buyers, the seller can easily turn to another party who will be able to purchase the property and fulfill their own lender’s financing conditions.
3. Look for a different lender: If the lender is unwilling to approve a loan for the full purchase price, consider finding a different lender who is willing to lend more. Just be aware that you may need to pay a higher interest rate or fees with a different lender. You can expect the Big five banks to be more conservative with their loans and appraisals, and alternative financing institutions may present attractive appraisals but with higher monthly payments or other potential downsides.

 How to Protect Yourself from Low Bank Appraisals

There are a few steps you can take to protect yourself from low bank appraisals:

1. Choose a reputable and experienced appraiser: The quality of the appraisal can vary greatly depending on the appraiser you choose. If you are purchasing a home for the first time, your standard appraiser will usually be chosen by your lending institution. Suppose you are considering a new mortgage for a current property and do not have a short timeline. In that case, you may be able to shop around and pit different institutions and appraisers against each other. Make sure to research and select an appraiser with a good track record and a solid understanding of the local market.
2. Provide the appraiser with relevant information: If you already own the home and are seeking a new mortgage, you can be ready at the door when the appraiser arrives. Point out any recent improvements to the property, and have the documentation to support the value of the property, make sure to share this with the appraiser. This helps ensure that the appraisal is as accurate as possible. Help them by providing accurate information about your home, and share information regarding key items, particularly if they are based on strata decisions. 
3. Get a pre-approval letter from the lender: A pre-approval letter from the lender can give you an idea of the maximum loan amount you can expect to receive based on your creditworthiness and other factors. This can help you set realistic expectations and avoid surprises during the appraisal process.
4. Ensure your agent has completed accurate market comparables, so you know whether or not your offer is in line with the general market. Work with an experienced realtor who is an expert in your local market. 
5. Build conditions into your offer that ensure your expected closing is contingent on securing financing at an appropriate rate. Refrain from getting into a situation where you are forced to close with unfavourable mortgage conditions due to a lack of conditions to protect you. 

A lender’s appraisal is a necessary part of any mortgage. Although you may not be able to fully control the process, any educated buyer can take steps to ensure their appraisal meets their expectations for their intended loan amount. If you are buying a new home, working with an experienced realtor will help ensure you have accurate comparables so that you don’t face any surprises.

Building conditions into your offer will also help you avoid any legal troubles that can arise if you are forced to close on a home appraised for less than your expected loan amount. If you are remortgaging your home, an experienced professional can help affect the appraisal positively by working with the appraiser to provide them with accurate, transparent information to support your home’s value. 

This independent assessment is another important part of the lender’s tool kit to protect themselves from downside. If you have any questions about appraisals or are dealing with difficulties caused by an assessment, reach out to our team. Loyal Home’s Client Care Coordinators can provide accurate and up-to-date information to help support you through any appraisal. We can also connect you with local, on-the-ground professionals who can provide you with the same level of customer care. Please let us know if you have any questions!