New home construction loan appraisal came low...

November 6, 2019

I just got the appraisal from the bank. Our building cost is $400,000 including site work and we purchased the lot for $32,000. The bank appraisal came back as $389,000 with the land price factored in. Bank provides 90% of the loan with a PMI during construction ($88/month). So, the bank will give only $348,000 and we have to come up with $48,000 as down.

We have reserved $65,000 for down. So, it's not difficult to meet the down requirements. The issue is, it's a good piece of property in a subdivision in that small town and our house is with many upgrades as tile and hardwood flooring, radiant heating, custom kitchen cabinets, wood siding, porch, deck, basement, attached garage, bonus room, etc. So, we were expecting a better appraisal. We haven't seen the appraisal document yet, and want to check whether they missed any key features.

Any thoughts?

Comments (39)

  • dan1888

    It could be that some of the upgrade item costs would not be recoverable in the event of a sale in your market. Custom kitchen cabinetry pricing can be higher, in some cases, than what other homes in the neighborhood would have. While that same cabinet cost would be allowed in a home costing $800,000 in a neighborhood of similarly priced homes, for example.

    A radiant heating system may require some educational stats to justify its higher initial cost over a commonly used forced air setup.

  • pb32

    Kitchens, cabinetry, and wood floors are all crazy expensive and don't appraise for what they cost. My numbers were almost the same as yours. Difference was mostly the 3 items I quoted.

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    Double staggered 2x4 walls is cheaper and proves better insulation than any spray foam. Unless you you sell property, it is not used as a "down payment". You're not understanding how financing for a build works. If the property is "worth" 50K without a home, and the estimate to build costs 150K, that does not mean that the completed home on that land is automatically worth 200K. The home and property--together-/ need to be appraised for what the bank could sell it for if you defaulted. Your neighborhood comps are what determine that final value, not what each element was valued at originally before they were joined. If the comps say that your new home and land would sell for 175, then they will only loan you 80% of that 175, not 80% of the 200K that the build costs. You'll need to bring 35K to the table, not 20K. You need a 20% contingency fund to cover overages that ALWAYS happen and the fact that you may not make the appraisal value. Most homes cost more to construct than they appraise for. It costs more to create something personalized than it does to buy a cookie in a cookie cutter neighborhood. And it's cheaper to buy existing than to build new.
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  • PRO
    The Kitchen Abode Ltd.

    You may also find that lending institutions are a bit more conservative these days when establishing a homes market value. It's worse here as they also stress test your ability to pay if interest rates were to increase by 2 percentage points. Lots of purchasers have to increase their down payments in order to meet this.

  • EJ M

    I just found that they use a comparison method-where they used 3 comparable homes in the county that were recently sold. It's such a stupid way because one house I know and that is a crappy one compared to what I'm building.

  • PRO
    Charles Ross Homes

    It is fairly common in our market for appraisals of construction cost of custom homes to come in around 80% of actual cost.

    There are a couple of reasons for custom home appraisals falling short of actual contract prices: First, most home appraisers dumb-down homes to square footage, no. of bedrooms and no. of baths. Your high quality, custom home isn't viewed much differently from some production-built spec home. Second, there is often a lack of market comparable cost data, because the price of a custom home is typically specified in a private contract between property owners and builders.

  • EJ M

    Charles Ross Homes,

    Very diligently put. I see that's exactly what happened with my case. Anyway, we were planning to borrow around $350K from the bank to go as we planned without financial issues. we are getting that even though with a low appraisal. So, our plans won't be affected.

  • cpartist

    Did it occur to you that you might be overbuilding for your neighborhood?

    Custom kitchens and wood siding won’t get you a dime more if you go to sell if similar homes in your neighborhood are only selling for 389k. What it will help is with you being able to sell the house faster.

    FYI: you never want to be the most expensive home in the neighborhood

  • Mrs Pete

    It could be that some of the upgrade item costs would not be recoverable in the event of a sale in your market.

    Exactly what I was thinking. Sure, you may be putting in high-end items like tile and hardwood floors, but those things may not -- as the above poster said well -- be recoverable in resale. That is, the tile may cost $$$, but on the resale market, it may only bring $.

  • suzyq53

    Since you are able to work with the proposed financing to build it out, you could possibly refinance after its built.

  • EJ M

    Good points CP, Pete, and suzy...

    We are not really building the most expensive house in the neighborhood. It's a very small town up north in the rural area and the usual suburban subdivision rules don't really get applied here. We are building it for our dwelling for the next 25-30 years. So, we want to have it for our convenience. The resale purpose is secondary.

  • shead

    The bigger question is will you have enough contingency funds after paying the down payment to cover any unforeseen expenses or overages? Trust me when I say that more than a few people have run out of money toward the end of the build because every extra dollar here and there adds up and one ends up having to sacrifice on finishes and/or pull money from their arse to cover it, me included.

    Having learned that lesson the hard way 15 years ago, I would advise someone to NEVER start a new build unless they have a 15-20% contingency fund. If you don't need it, GREAT! Just pay it on the principal (or upgrade finishes or landscaping) at the end of the build, but if you do need it, you won't be sweating the small stuff at the end and your stress level will not be at maximum.

  • EJ M

    shead, you are absolutely right.... we do have some contingency fund. All the upgrades we want are listed already in the contract and we have the numbers for cabinets, worked out plumbing, appliances and lighting fixtures already in hand (not builder allowances, but what we really wanted to buy... of course, it all came more than the allowances, but we got it covered). But, as you said.... you never know.... so we have some backups from family members if something that's really unexpected happens.

  • PRO
    Jeffrey R. Grenz, General Contractor

    12% down is extremely low so you are lucky.

    Many of those extras won't bring full value an that price range. In other words, you may be "overbuilding" and typically that comes out of your pocket.

  • ashtonchic

    The bank or S&L you are borrowing from will most likely package your loan with others and sell the package on the secondary market. Your appraisal and house will have to fit the criteria of the package or they won't be able to sell your loan in the package (and be able to make new loans). They would have to carry your loan themselves. There have been a couple of scandals in the business over the years - so be glad you got the money you need. They probably took that into account.

  • tangerinedoor

    IMO, the builder should have steered you or educated you from the beginning to focus on "appraisability".

    If you're committed to the extras, you're committed to making up the difference between the appraisal and the construction cost. That simple.

    Plus, it's likely you haven't heard the full amount of the construction cost. Tariffs, mistakes, sourcing.... PERMITS, sewer and water hookup fees, garbage collection, inspection fees, electric meter, internet/TV new location....

    Worse still, if you cough up the difference from your savings, you'll be upside down in the home from the get-go. The bank has determined the going price in your neighborhood is $389k. That's what they think it's worth.. But they're only willing to stake $348k to keep their assets safe. So, if you pay out $400k for it, you're underwater a whole bunch. PLUS, don't forget, what you have to shell out for build overages; that adds to the upside down. You seriously want to be underwater that amount? Especially since the overage is going to be scrounged from friends and family?

    IMO it's time to trim back the fancies if you're into solvency and staying on good terms with your nearest and dearest.

  • suzyq53

    Are there any homes similar to your's that are already built and have been sold? If there aren't comps available it might be a cost approach appraisal which would be the land plus the current price to replace (build) your home and not the fair market value of your home or a sales approach appraisal.

  • jlhug

    Most lenders don’t care what it costs to build a house. They are concerned with getting all of their money back if you default on the property. The market approach does the best job of estimating the sale price of a house.

  • PRO
    Jeffrey R. Grenz, General Contractor

    @tangerinedoor Most builders aren't really tuned into the appraised market value, but those extras could be easily eliminated.

  • patriceny

    You sound like you've got a good head on your shoulders. I salute your calmness. That will serve you well in the coming months, because I can basically promise you this won't be the last of the unexpected issues that pop up. Building a house tests your sanity in so many ways....

    My final appraisal came up from the first one they did, by the way. That final appraisal is a fun one. I was sweating bullets. I don't know if actually seeing my pretty finished house factored into it, because I didn't change anything substantial from the submitted plans. And I even had the cash on hand to deal with it if their final appraisal came in way under expected. But it's still nerve wracking for some reason....

  • PRO
    Patricia Colwell Consulting

    I think the bank has no way of knowing what your house would sell for all they have to go on is what other homes in the area sold for that is the banks bottom line . They only care about getting their money back if you can’t pay the mortgage.

  • PRO
    Charles Ross Homes

    An appraisal based on market comps is the best estimate of what your home would sell for in the lender's time period of interest (30 days, 60 days, 90 days, etc.) It's far from perfect, but it does reflect how buyers evaluate homes: amount of living space, garages, decks, porches, no. bedrooms, baths, etc. In our market, buyers consider both new and resale homes at the same time and they don't apply much of a premium for the benefits of new construction. It follows that appraisals don't either.

    The other type of appraisal--a cost to construct appraisal-- will likely come pretty close to your contract price. However, most underwriters won't use them as the basis for the amount of mortgage money your lender will lend you.

  • opaone

    A lot of good info here.

    - As said, banks are only interested in protecting their assets. They want to make sure that if you default that they can get their money back so the appraisal is based on what they are relatively sure that they will be able to sell it for if necessary.

    - Higher quality than neighboring houses is worth only about 10% of the added cost from an appraisal standpoint. These MAY be worth considerably more in an actual sale but that is difficult to predict.

    - If you can afford it and you plan to live there as long as you say then I would definitely go for any upgraded stuff you want. We did 30 years ago when we built, 25 years ago for finishing our LL, 15 years ago for gutting and redoing our kitchen and much of our main level, and 7 years ago when we gutted and redid our master bath and bedroom. We've fully enjoyed for many years the nicer bits.

    - Plan a minimum contingency fund of 20% of your contract price. We've already had significant overages on excavation, framing, sewer line install, and several other bits. Our plumbing fixtures were almost double the allowance, lighting slightly over double. Same for flooring and other allowance bits. If you want any outlets beyond the bare minimum for code (and you will because meeting code doesn't give you what you want) then you'll need money for that. Our LV, HA, AV, security & Survelliance came in at almost 3x allowance even though what we're doing is exactly what I'd specified at the beginning. Yes, we're a bit irritated with our builder over his exceptionally poor or outright dishonest budgeting.

    Good luck on your build.

  • PRO
    Charles Ross Homes

    As a point of clarification, the mortgage appraisal process is highly regulated by the federal government.

  • EJ M


    Yes, homes similar to mine are sold in the 400k-450k in the neighborhood. That's the reason for my surprise when I saw that appraisal. Anyway, we are getting what we need from the bank, so it's not a big deal.

    About the upgrades, yes, we could save 25-30K right away by shaving three upgrades: Vinyl for engineered wood siding (10K), carpet for tiles (10k), and baseboard heating for radiant heating (8K) and no heat pumps (8000). These are not bringing much value to appraisal. But, it's all about priority.

    Priority 1: Do we want the appraisal value close to potential resale/market value: Yes, we do.

    Priority 2: Do we want to live in a home that is built for us and meet our needs: Yes, we do.

    Is 1 or 2 more important? The answer is:- 2 is more important for us as we want to settle in this house for the rest of our life. Luckily, we have the money to afford it. If I was thinking about moving in 10 years, yes, I would have taken away all that upgrades.

  • mackdolan

    There isn't a single lender that bases a mortgage appraisal on the cost to build. Only what the market says that it could be sold for once complete. That very often is much less than a home costs to build due to the HGTV Woebegone effect of everyone wanting to be above “average” and getting suckered by the term “upgrade” without realizing that it adds almost nothing to the actual home value.

    Im surprised that you would even find a lender who would offer 90% financing for a build. It’s a bad move on your part to have that ratio and then have to have mortgage insurance rolled into the equation. You need to be able to put at least 20% down to avoid that situation. Plus have that 20% contingency fee. You may want to scale back on your upgrades to have more liquidity to face the coming unexpected overages.

  • EJ M


    Agree totally. The cost and reserve I mentioned are only for the site work and construction. Site work and septic were already done on the exact budget. So, no issue there.

    The first thing we did when planned for construction is to make an excel sheet with all these different items. We made a list of City Permits, utility connections, subdivision fees, etc. and assigned appropriate amounts towards it, totally separated from construction cost. We already got all the city permits, septic design and the permits, subdivision fees, got an electric connection with a post cost involved and only pending item is city water connection.

    In addition, we made a plumbing and lighting fixture list we would like to get, visited stores and got the prices. We made a list and calculated the total expense even before the builder gave us his allowance (guess what, plumbing allowance was $3500 less and lighting was $2800 less than our price, but we were already expecting that as the builder-grade allowance is always lower than premium quality fixtures).

    Same with the appliances. We already visited the local appliances store, purchased all Bosch appliances for $11,300, paid half and rest is on 0% interest loan. The builder allowance was $7000. Again, I knew it would be low, but I already saved for my appliances.

    There is an amount already reserved for blasting in case any big rocks appear. Fingers crossed and so far into clearing and stump removal no sign of rocks. But you never know when they dig. Still, I expect a few unexpected costs on the way and I think we are prepared for it.

  • EJ M


    I have a question. Why some of the non-allowance construction cost items cost more? Once you sign the contract, unless there is a change order, aren't they supposed to finish the described item for that cost? For example, for our excavation, site clearing, and digging, the only extra cost would be if we have to blast. Otherwise, no matter how many days they take to dig or clear, they shouldn't charge you more. They are supposed to finish the work in the agreement unless events related to weather or backorder or unavailability of the product, etc. come along?

  • EJ M


    I would say our preparation and research paid off. We did really in-depth research and saw how people were unprepared and panicked. So, we thought about all sides, hope for the best and prepared for the worst.

    we were prepared for up to a 75% under-estimation. When I saw the number, I was surprised, but it was still 90% of the cost. So, we knew that we had nothing to worry about. This is a house we will spend the next 25-30 years. So, I'm getting all my upgrades as planned.

  • Linda

    Are you building in a subdivision with similar homes? Is your builder building the rest of the homes? IF yes, go back to the builder with your appraisal and renegotiate the price. Your contract will most definitely let you out of the contract if the house doesnt appraise. No one wants to pay more for a house than its worth.

  • tangerinedoor

    EJM, you started the thread by asking for "thoughts", but it seems as though you don't actually want any, since you keep defending what you've already decided and wanting approval.

    Actually, there's scarcely a post here that is encouraging your cost outlay.

    Furthermore, you may be expecting to live there 'til the end of time, but often life doesn't work out that way.

    Life catastrophes (major illness, divorce, death, natural events) can mess up your finances and cause you to have to let go of your house.

    To be real, you have no idea whether your "preparation and research paid off", for the simple reason your house hasn't been built yet.

  • tangerinedoor

    As I understand it, you have $432k prospective for build and land.

    Your additional outlay for appliances and lighting? Those are "construction costs": though you may have paid out of pocket, they are nonetheless essential categories for a viable house. This removes your "construction costs" even further from the appraised value. It looks like you haven't added this extra costs onto your spreadsheet.

    If I have this math correct, versus your appraisal, you're about $60k unsecured and underwater. Before you get to unforeseen cost increases....

  • tangerinedoor

    You've purchased builders' risk insurance?

  • 5iveminutesorless !

    I've heard similar story thing to do is this

    --keep the low appraisal and pay bigger down payment amount upfront, you will have a better chance of getting a higher final appraisal when the house is finished but at least same amount as original appraisal. You pay it out of your own pocket or have the bank pay it, either way you are paying

    --if it appraise higher(20% more than original loan amount) then maybe you can refinance to get rid of the PMI

    --it would have helped if you got a fixed price contract, but I assume you didn't get this.

    Good luck!

  • 5iveminutesorless !

    btw, there shouldn't be no PMI during the construction phase, only when it converts to mortgage

  • 5iveminutesorless !

    tangerine door,

    I wouldn't call it underwater, meaning he will not owe more than the house will be worth. If he put money upfront and then only owe what the house is worth then that's not underwater to me in a mortgage sense.

  • robin0919

    WITW are you? A lot only cost 32k but the house cost is 400k. That's own heard of hear in the Charlotte area.

  • tangerinedoor

    Good correction, 5iveminutes. Still, the gap between current value and the real construction cost would have me very worried were I the homeowner. The gap would be uninsurable.

    Robin, I was surprised at the lot cost, too: a very nice house on a bargain lot in an area of $400k-$450k houses? Hmmmm....

    My personal experience with lot prices.... I just bought mine this year. It cost roughly the same as EJM's. It puts the "rough" in "diamond". It abuts an "affordable housing" subdivision in an area rated "rural". It has a cliff in the middle, 2 catchbasins for street runoff, berms, and a 3 foot wide underground storm drain cutting diagonally across the lot. I can't build anything on top of the drains or berms. Buildable square footage? About 800. No carport/garage.

    Around here, a lot with buildable space for a family-size $400k house would be 3x that much.

  • lindacottonwood


    .Why would you buy a lot like that?

  • tangerinedoor

    lindacottonwood, It was the only lot I could afford, and my house is 700 square feet. It's a fantastic lot for me. I don't see any neighbors from my windows, it's brilliantly sunny but has lots of trees, birds, and living things, and my solar works great! What's not to like?

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