What to do when the appraisal is higher than the purchase price

In real estate, it’s important to know exactly what a property is worth. Buyers want to know they’re not overpaying, sellers want to ensure they’re getting a fair price, and lenders want to verify the home’s value actually covers the loan amount.

Appraisals estimate the market value of a home. Often, the appraisal matches the purchase price and the deal goes forward without issue. But sometimes the appraisal comes in higher than the purchase price. 

Below, you’ll find out what leads to a home appraisal higher than the purchase price and how it affects financing, equity, and negotiations — for better or worse. You’ll also learn how Better can save you money and guide you smoothly through the appraisal and closing process.

Factors that make an appraisal higher than the purchase price

There are several circumstances where the appraised value of a home can turn out to be higher than the listing price. 

The listing agent set the purchase price too low

Deciding on a purchase price for a home is both an art and a science. While the process does involve hard data — comparable recent sales in the area, the state of the market, the condition and features of the property — there’s no fixed formula.

Agents look beyond the numbers to incorporate their experience and professional judgment before settling on a final price. Because there’s no set guideline to follow, the sale price might end up higher or lower than the appraisal value.

Underpricing isn’t always a mistake. If the seller is very motivated, the agent may intentionally set the purchase price lower than the market value to move the home faster.

The appraiser discovered features that add value

If the listing agent didn’t account for features like high-end appliances, energy-efficient upgrades, or high-quality materials, they won’t be reflected in the listing price. If the appraiser catches them, the valuation will likely show a higher market value than the purchase price.

The market is hot

When markets move fast, comparable sales become outdated quickly. That means the appraised value may exceed the sale price since the appraiser bases their estimate on the latest market conditions, not the data the listing agent originally used.

What happens if the appraisal is higher than the offer?

Unlike an appraisal that’s lower than the offer, which can create financing issues or force renegotiation, it’s beneficial to have a high appraisal for most buyers. 

Pros of a high appraisal

The primary advantages of a high appraisal are:

Instant equity

The difference between the appraised value and the loan amount means the buyer gains equity before they’ve even made the first payment. For example, suppose you purchase a property for $500,000 with a $400,000 mortgage. If the appraisal report shows a market value of $510,000, you have $110,000 in equity right off the bat instead of just $100,000.

More favorable loan-to-value ratio

The buyer’s loan-to-value (LTV) ratio after the mortgage goes through turns out to be better than expected when the home appraisal is high. That’s because the loan amount makes up a smaller percentage of the home value.

Your LTV ratio is one of the main metrics lenders look at when you apply for a mortgage or refinance. The instant equity you get from a higher appraisal drives down this number, and the lower your LTV ratio, the more attractive you are to lenders. This is because lenders view you as lower-risk if you have more equity in the home. Plus, if your LTV ratio drops to 80% or below, you likely won’t need to pay for private mortgage insurance (PMI).

If you already own a home, you may be able to lock in a lower rate by refinancing with Better. With 24/7 support, no hidden fees, and a preapproval process that takes as little as 3 minutes to complete, Better helps you move faster and save money without the hassle. Try our refinancing calculator today to see how much you could save.

...in as little as 3 minutes – no credit impact

Cons of a high appraisal

Potential challenges of a high appraisal include:

Seller’s remorse

If the seller is upset that the appraised value is higher than the sale price, they may push for renegotiation. Though this could create a tense situation, the buyer is under no obligation to renegotiate because the contract is legally binding by the time the appraisal takes place.

Potentially higher property taxes

In most areas, property taxes are levied based on the assessed value of a property rather than the purchase price. While a higher appraisal doesn’t directly mean you’ll pay more in property taxes, future assessments may be higher than initially expected, which would result in higher property taxes. 

Fortunately, because the difference between the listing price and the appraised value isn’t likely to be extreme, the increase should be small.

How do lenders respond when the appraisal is higher than the purchase price?

Just like for buyers, it’s typically good news for lenders when a house is appraised for more than the offer. Since the home is worth more than the loan amount, that instant equity the buyer gets translates into a bigger cushion, making it less likely that the borrower will default on payments.

Can the seller renegotiate the contract after the appraisal?

There’s nothing stopping the buyer and seller from renegotiating the contract if both parties agree. That said, sellers are still legally bound to the transaction if the appraisal comes back higher than the offer, which means there’s no benefit to renegotiating for the buyer. This makes it a fair assumption that most will turn down the proposal.

An exception might be transactions between close friends or relatives, where the goal is to strike a fair deal, not necessarily the most advantageous one.

Can the seller back out if the appraisal is higher than the offer?

If the contract includes an appraisal contingency, buyers can legally back out of the agreement if the appraisal price is lower than the purchase price. The seller doesn’t have the same option when the appraisal is higher than the offer because a higher home appraisal doesn’t hurt the deal. The buyer gets instant equity and, more importantly, the lender knows the home’s value covers the loan, so financing is unaffected.

Nonetheless, there are a few situations where the seller can legally back out of a deal:

Before signing the contract

Naturally, both the seller and the buyer have the right not to go through with the sale if they haven’t yet signed the contract. Having a verbal agreement or a written contract that isn’t signed isn’t legally binding.

During the attorney review period

Some states require a licensed real estate attorney to review contracts and oversee the closing process. In those states, both the seller and the buyer have the right to cancel the contract for any reason while the review is in progress. This could be due to concerns that arise during the review, new information about the property, or just because the buyer or seller changed their mind.

If the buyer breaches the contract

If the buyer doesn’t satisfy the conditions laid out in the contract, the seller can cancel it. This might happen when the buyer doesn’t follow through with requested repairs or doesn’t secure a mortgage on time.

Get preapproved in moments with Better

In most cases, it’s good to have a high appraisal when you’re buying a home. The surprise boost in equity and improved loan-to-value ratio make you more attractive to lenders — and Better is no exception.

With Better’s tech-driven approach, you can get preapproved in as little as three minutes and receive your funds in as little as seven days. We offer competitive rates with no hidden fees and no surprises. Plug the numbers into our free mortgage calculator to see what your monthly payments might look like today.

...in as little as 3 minutes – no credit impact

FAQs

Do sellers have to reduce the purchase price after a low appraisal?

Buyers may ask the seller to reduce the purchase price if the appraised value is lower rather than higher, but sellers aren’t legally obligated to agree. Nonetheless, they may be willing to renegotiate in order to move the deal along. Some sellers are willing to take a small price reduction rather than letting the buyer walk away and having to start the listing process over again.

Can a higher appraisal raise property taxes?

Yes, but only indirectly. Property taxes are levied based on the assessed value of the home, so you might end up with higher property taxes than expected if future assessments are closer to the appraised value than the sale price.

Does a high appraisal change my mortgage amount?

No. Lenders base your loan on whichever amount is lower, the purchase price or the appraisal value.