When the Appraisal Comes in Below the Purchase Price: Who Covers the Gap?

Jérôme finally won. After two visits and an offer competing with two other buyers, his offer to purchase was accepted at $520,000. He planned a 20% down payment, $104,000, to avoid mortgage loan insurance. A few days later, the lender told him the property appraised at $495,000.

His pre-approval was still valid. His income hadn’t changed. Yet his financing no longer worked as planned. We see this situation regularly, and it almost always comes as a surprise.

For the lender, the property is the security for the loan. What matters isn’t the amount you agreed to pay, it’s what the property is worth according to its appraisal. In practice, the loan is calculated on the lending value, which is generally the lower of the purchase price and the appraised value.

This is also what your pre-approval doesn’t cover. It confirms that you qualify for a certain amount. It says nothing about the value of the property you choose afterwards.

The appraisal takes place after your offer is accepted, during the period set for the financing condition. According to the OACIQ, this period is usually at least 14 days. Depending on the file and the lender, the value may be established by an automated valuation tool or by a visit from a certified appraiser.

That window is short. If the appraisal comes in lower than expected, a solution has to be found quickly, which is why it’s worth discussing before you even make an offer.

Back to Jérôme. The gap between the price and the appraisal is $25,000, but the effect on his financing goes beyond that amount.

Purchase price: $520,000. Appraised value: $495,000.

Planned loan: $416,000 ($520,000 minus a $104,000 down payment).

Loan-to-value ratio based on the appraisal: $416,000 ÷ $495,000 = 84%. He is no longer under the 80% threshold that let him avoid mortgage loan insurance.

Option A, keep a conventional mortgage. The maximum loan becomes 80% of $495,000, or $396,000. Jérôme must put down $124,000 in cash instead of $104,000, which is $20,000 more.

Option B, keep the same loan with mortgage loan insurance. With a ratio between 80.01% and 85%, the CMHC premium is 2.80%, about $11,650 added to the loan. In Quebec, the 9% tax on the premium (about $1,050) must be paid in cash at the notary.

These figures are for illustration only. Above all, they show one thing: an appraisal gap is paid for either in cash or in insurance costs, and sometimes both.

Every file is different, but here are the avenues we generally look at with our clients.

In an offer to purchase, the financing condition gives you time to secure your loan. If the appraisal complicates things, that condition is what gives you room to explore your options. Waiving it to make an offer more attractive removes that safety net. If you’re considering it, talk to your real estate broker and to us before signing.

The lender calculates your loan on the value it recognizes for the property, not on the price you pay. When the appraisal comes in lower, the gap is covered with a larger down payment, a renegotiation or mortgage loan insurance. The sooner you talk to your broker, the more options you have.