If an appraisal is lower than your purchase price, the lender will only finance the lower amount. Generally, you have three options: cover the shortfall with your own cash, renegotiate the price with the seller, or walk away without penalty if you have a financing subject in place.
In Metro Vancouver’s fast-paced real estate market, bidding wars frequently push the purchase price of a home far above its listed value. While you might be willing to pay a premium to secure your dream house, your mortgage lender remains focused purely on the home’s objective market value. Lenders require an independent appraisal to ensure they are not loaning more money than the property is actually worth.
When an appraisal comes in short, it creates a sudden and stressful funding gap. 😕 If you offered $1,000,000 but the bank appraises it at $900,000, the lender will only calculate your mortgage based on the $900,000 value. Understanding your legal and financial options quickly is critical to saving the deal or protecting your deposit.
Step-by-Step Process in Vancouver
Dealing with an appraisal shortfall requires fast action, usually within your 7-day subject removal period. Whether you are buying in Coquitlam, Richmond, or Vancouver, the steps to resolve this issue are generally the same.
Step 1: Review the Appraisal with Your Broker
As soon as the low appraisal comes in, schedule a call with your mortgage broker. 📊 Sometimes appraisers make errors, such as using outdated comparable sales or overlooking a recently renovated basement suite. If there are obvious mistakes, your broker can formally challenge the report.
Step 2: Negotiate with the Seller
If the appraisal is accurate, ask your Realtor to communicate the shortfall to the seller’s agent. In a cooling market, the seller may agree to lower the purchase price to match the appraised value, rather than letting the deal collapse and starting over.
Step 3: Explore Alternative Lenders
If the seller refuses to budge, your broker might suggest approaching a different lender or a “B-Lender” (alternative financing). 💰 Another lender might use a different appraisal company that views the property’s value more favourably, though alternative lenders often charge higher interest rates.
Step 4: Make Your Final Decision
Ultimately, if you cannot bridge the gap, you must decide whether to collapse the deal. If your Contract of Purchase and Sale includes a “subject to financing” clause, your Realtor will notify the seller that you are not removing subjects, and you can walk away safely.
How Much Does it Cost in Vancouver?
Bridging an appraisal gap usually requires injecting more of your own money into the transaction. If you decide to proceed, you must be prepared for the extra costs.
| Cash Shortfall (Buyer’s responsibility) | $10,000 – $100,000+ CAD |
| Second Appraisal Fee (If requested) | $300 – $500 CAD |
| B-Lender Brokerage Fee (If switching lenders) | 1% – 2% of the mortgage amount |
Remember that the cash used to cover an appraisal gap is in addition to your minimum down payment and your closing costs, such as the BC Property Transfer Tax and lawyer fees. 💳 You cannot borrow this shortfall from a standard credit card or line of credit without the lender recalculating your debt ratios.
How Long Does the Process Take?
You typically only have a few days to solve an appraisal issue. Because appraisals are usually ordered shortly after an offer is accepted, the report arrives around day 4 or 5 of your standard 7-day subject removal period. This leaves you with just 48 to 72 hours to negotiate a new price, find the cash, or secure a new lender.
Frequently Asked Questions (FAQ)
What happens if I wrote a subject-free offer?
If you submitted an offer without a financing subject and the appraisal comes in low, you are legally bound to complete the purchase. If you cannot find the cash to close the gap, you will lose your deposit and the seller can sue you for breach of contract.
Can I ask the seller for an extension?
Yes, your Realtor can draft an addendum asking the seller to extend the subject removal date by a few days to give you time to find alternative financing. However, the seller is not legally obligated to agree to the extension.
Will CMHC cover an appraisal shortfall?
No. The Canada Mortgage and Housing Corporation (CMHC) provides mortgage default insurance for the lender, not the buyer. They will only insure the mortgage up to the appraised value of the property.
Can I use a gift from family to cover the gap?
Yes, most lenders in Canada allow immediate family members (parents, grandparents) to gift you the money needed to cover an appraisal shortfall. The family member will need to sign a formal “gift letter” confirming the money is not a loan.
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