For many home buyers, this news triggers immediate panic. Does the low appraisal mean the deal is dead? Did you overpay? Will the bank pull your financing?
In a dynamic market like the GTA, an appraisal shortfall is more common than you think. The good news is that it doesn’t have to be a disaster. With the right strategy, it’s often just a math problem that can be solved smoothly.
What is an Appraisal Shortfall?
An appraisal shortfall happens when a lender’s independent appraiser determines the fair market value of a property is less than the price you agreed to pay for it.
Lenders and their insurers are cautious. They will only secure a mortgage against the tangible value of the asset. Therefore, they have a strict rule: the mortgage amount must be based on the lower of the Purchase Price or the Appraised Value.
This gap between the price you’re paying and the value the bank recognizes is the “shortfall.”
A Real-World Example: How a Low Appraisal Works
Let’s walk through the numbers in a typical Toronto scenario to make it clear. In this case, the home is over $1 million and the buyer is making a significant down payment, which means it is a conventional, uninsured mortgage from the start.
- Your Agreed Purchase Price: $1,200,000
- The Official Appraised Value: $1,150,000
- The Appraisal Shortfall: $50,000
This $50,000 is the portion of the price the lender will not finance. Now, let’s see how this affects your mortgage. Imagine your original plan was to make a 30% down payment.
- Your Planned Down Payment: $360,000 (30% of $1.2M)
- Your Planned Mortgage: $840,000
Even with the low appraisal, a lender will almost certainly still provide the $840,000 mortgage because your file is strong and your down payment is large enough to absorb the shortfall easily.
The Solution: How Your Down Payment Solves the Problem
This is the key takeaway: you do not need to come up with extra money. Your existing funds are simply re-allocated on paper by your lawyer.
Here’s the final calculation for closing day:
- Total Price the Seller Must Receive: $1,200,000
- Total Money from Your Mortgage: $840,000
- Total Cash You Must Bring to Close: $1,200,000 – $840,000 = $360,000
As you can see, the bottom line for you is exactly the same as your original plan. Your $360,000 in cash is now simply covering two things: the “required” down payment in the bank’s eyes, plus the $50,000 appraisal shortfall.
Why Getting “Underwritten Upfront” is Your Best Defence
An appraisal shortfall can become a true crisis if your financing is not rock-solid. If a buyer’s file is weak, a low appraisal can cause a lender to get nervous and pull the approval.
This is precisely why our Underwritten Upfront process is the bedrock of a 5-Star client experience. We get your income, credit, and down payment fully verified and approved by the lender before you ever make an offer.
When your file is already a sure thing, a common issue like an appraisal shortfall is treated as a minor administrative step, not a reason to panic. It’s a contingency that a well-prepared mortgage plan anticipates and solves, ensuring you get to your closing day stress-free.