New Construction Home Appraisal Less than Purchase Price

new construction home appraisal less purchase price

If a new construction home appraisal comes in lower than the purchase price, the lender will require the borrower to increase the downpayment to cover the difference and lower the qualifying mortgage amount.

When you are purchasing a new build home from a builder, it’s important to be mindful of the base cost of the home, including any sales taxes on the build. Additionally, the cost of your upgrades may factor in – that is, if you are adding these costs to your mortgage. Some people will choose to pay for the upgrades out of their pocket, rather than including these costs in their mortgage.

If you are adding the cost of upgrades to your mortgage, it’s really important to consider how much you could be paying for this upgrade. Let’s say you choose to upgrade kitchen cabinets, and you amortize the cost of over 30 years. You may one day decide to tear down the kitchen and rebuild, but you’ll still be paying for the upgrade and its associated cost over the entire thirty years.

A certified home appraiser with experience in new builds will be able to provide an accurate appraisal of the new construction home. An appraisal requires a starting point, and in most cases – these are considered comparables. Comparables are sales prices of similar homes that have sold in the area. Most real estate appraisal companies will use comparables as a base and build the price up or down to create a property value report.

With new build homes, it is common for the lender to request an on-site appraisal. In such cases, the appraiser will wait until the home is near completion so they may enter the home. All builders are familiar with lender requirements and will allow appraisers to visit the property for an inspection.

In most cases, appraisers consider a new construction home that is 98% complete to be in completed status. Even if a few minor items are not completed, the appraiser will highlight them in their notes and provide supporting photos in their report.

How Common is a Low Appraisal

According to The Federal National Mortgage Association, a home appraisal comes lower than the purchase price about 8 out of 100 times. A new construction home may appraise lower for a few reasons:

  • Current Market Activity and Condition
  • Extensive Home Upgrades that Do Not Add Value
  • Overpriced Builder Base Price
  • Neighborhood Conditions

A new build home is not appraised against other newly built homes, they are appraised against resales that have occurred in the neighborhood. If there is a lack of comparables, this could be a sign of a weak appraisal.

Over the years, we have seen low appraisals for new construction homes when the market takes a turn and dips. In an environment where a seller’s market becomes a buyer’s market, there is a chance of low appraisals.

For example, during a seller’s market – the seller has an advantage (in this case, the builder), and new construction homes can sell high. However, if your closing date arrives in a buyer’s market, where prices have started to plateau – it could lead to an appraisal that falls below the purchase price.

What You Should Do If House Appraisal Comes in Low

There are a few things you can do if your new construction home appraisal is lower than your contract price. Depending on your situation, the solution to the problem may be different.


If you receive a low appraisal; communicate with your mortgage broker or lender. If you do not challenge the appraisal – you may not know why the appraisal came in lower. Most homebuyers find themselves out of this problem by simply requesting a second appraisal. There have been buyers who have received appraisals from two or three different appraisers, where the difference between each fall upwards of $100,000.

When an appraisal is challenged, errors and omissions will come to light. The primary reason for the communication is to know if the appraisal gap is due to market conditions, expensive home upgrades, the laziness of the appraiser, or a lack of comparables.

Builder Approved Lender

A builder-approved lender is a mortgage lender that knows and understands the builder’s project, and can confidently accept the builder’s base pricing. These lenders choose to work with the builder, because of the bulk number of homeowners they can gain business from. Prior to receiving your mortgage application, the lender would have already seen the specs of your model home, along with the base price. If the builder’s prices seemed far higher than they should be – the lender would communicate this with the builder.

Reasons Why New Build Homes Appraise Low

Earlier we looked at a few reasons why a new construction home may appraise lower than the purchase price. In the real world, there are many reasons why a home appraisal may be below the expected value. Let’s start with:

Current Market Activity and Conditions

The current market condition is a large indicator of the real estate market. In 2020-2022, we witnessed unprecedented demands in the housing market. The real estate market was moving at a fast pace, which led appraisal values to fall behind actual resale values. Experts would identify this market as a hot housing market.

A hot housing market (seller’s market) was evident between 2020 and 2022 when we saw homes selling over-asking through blind-bidding wars.

In a very fast-moving market, appraisers need to keep up with the most recent sales. In this condition, comparables from two months ago will lag behind those selling in the current month.

In a slow-moving market, appraisals can come lower than the purchase price if there is a lack of comparables. If there are limited resales in the last six months that are comparable to the size and quality of your home – it can be hard to provide an accurate appraisal.

Home Upgrades that Do Not Add Value

New construction homes are sold with minimal to no upgrades, as these are chosen by the buyer. If a buyer has chosen home upgrades that do not add value to the home – this can lead to receiving an appraisal that falls below the price they paid.

We wrote a powerful post on new construction home upgrades to avoid, and we recommend you read this. We go through the upgrades that do not add value to the home.

For example, if you have added many cosmetic upgrades to the home, and included the cost of the upgrades in your mortgage – this can lead to a purchase price that is higher than the bank’s appraisal. In essence, some home upgrades are expensive to purchase, and they add little to no value to the home.

Recommended Reads:

Overpriced Builder Base Price

If a builder has priced their new build models higher than the market value, it could be a problem for some purchasers. A home builder may list a model home at a specific price, but this does not indicate buyers are actually buying the home.

There was a home builder in a Canadian city that was selling overpriced townhouses. Unfortunately, the builder was not able to reach their target sale – which resulted in the project getting re-priced.

If you believe a new build home is overpriced; we would recommend getting the opinion of a local realtor. A local realtor would have access to some comparable data, which can provide some assurance when deciding to purchase a new build home.


With gentrification in older neighborhoods, some home builders are tearing down older buildings to develop new projects. If a rough neighborhood with lower market values becomes home to new projects – it can take a little bit of time for real estate values to catch up.

If you are considering a new build home in an older neighborhood, you should try to understand the current home values in the area. The neighborhood can be a determining factor in the home appraisal if you are part of the first phase of the build. Once a few build phases have been completed and taken possession of – there is less risk of an appraisal gap.

What Happens if You Can’t Close on a New Build

If there is an appraisal gap, and you cannot close on the new construction home, you not only stand to lose the initial deposit – but you may face legal consequences. The builder can take the buyer to court to recover the monetary loss. The monetary loss can be the remaining deposit you agreed to pay or the difference between the final selling price of the home and the price you agreed to pay for the build.

If you are thinking about walking away from a new build, we suggest you read about backing out of a new construction home contract. A home builder’s contract is carefully drafted by their lawyers and would contain a clause that makes the buyer liable for the difference when there is an appraisal gap.

Most mortgage brokers recommend having more than the required downpayment – as this gives you some financial breathing room in these situations.