It’s no secret that the housing market has been a bit unusual this year. With low inventory and eager buyers, it has been a dream for sellers while nearly impossible for thousands of homebuyers who have been on the lookout for affordable options. Homes are receiving multiple offers above the asking price, which puts those who seek financing via a lender in a delicate situation. That’s because most lenders will not loan more than the home’s appraised value.

An appraisal is when an independent third party evaluates a home to determine its current market value. Obtaining an appraisal is an important and necessary step in the mortgage process. The majority of lenders require this in order to confirm that the value of the property aligns with the amount being borrowed. However, this makes it tough for those purchasing a home through financing to compete with cash offers. In a normal housing market, buyers will often make an offer and include an appraisal contingency, giving them the ability to back out of a real estate sales contract if the home’s appraised value is less than the offer.

However, with inventory so low, many are seeing the benefit of waiving such contingencies to be in better standing with the seller. While this could increase your chance of having your offer accepted, it may not be the best idea for your finances in the long term. When waiving an appraisal contingency, that means you’re willing to pay the amount you offer, regardless of what the house is actually worth. If the appraised value is less than the offered price of the home, the you would need to make up the difference in the value with cash. Appraisals don’t only benefit the lender; they are an important guide so homebuyers don’t pay more than a house is worth, and potentially end up owing more than the market value of the house. To help borrowers stay in the game, some are now offering Appraisal Guarantees. Designed so that borrowers don’t have to worry about a low appraisal affecting their home purchase, this program has its drawbacks. For instance – to use an Appraisal Guarantee, the loan must meet the lender’s requirements including a providing a minimum down payment and staying below the maximum loan amount. Homebuyers using the Appraisal Guarantee are also required to use the lender’s affiliate real estate agent. This could take a lot of properties off the table. Using this option may do more harm than good if the housing market corrects itself because the borrower risks being underwater, or owing more than their home is worth, on their mortgage. That’s because they’re paying more than what the home is actually worth, which isn’t sustainable once the market evens out. When the buyer is ready to sell, the comps—or similar homes have recently sold in the area—may not be in their favor.

So how do you compete in today’s market without shooting yourself in the foot? There are several options that can help you avoid borrowing more. First, talk to a lender that can help you determine what you can realistically afford. Once you’re pre-approved for a specific amount, look for homes that are under budget so that you can be prepared to offer more. Also, find a great real estate agent whose negotiating skills you can benefit from. They can often be your best bet when it comes to helping you make a strong offer and stand out in a competitive market. If possible, be flexible on your location. Your wish list may be easier to obtain in one location than another. These strategies may not result in your absolute dream home but you’ll also avoid borrowing more than your home is worth, which could be a relief when prices average out.

At the end of the day, don’t let the idea of an appraisal scare you away from pursuing your dream of owning your own home. It’s a necessary step designed to protect everyone involved, especially you—the homebuyer. Let a Silverton Mortgage professional help you find the right loan to fit your unique needs so that you are comfortable with your home purchase now and later on down the road.