What a Home Appraisal Is and Why It Can Change Your Financing

Why the Appraisal Exists

When you apply for a mortgage, your lender is not lending against the purchase price. They are lending against the property's value as determined by an independent appraiser. The distinction matters because the two numbers are not always the same.

The appraiser's job is to protect the lender. If you default on the mortgage and the lender has to sell the property, they need to know they can recover what they lent. That is the entire purpose of the exercise. It is not a second opinion on whether you are paying a fair price, although it can function as one.

What the Appraiser Actually Does

A licensed appraiser visits the property, measures it, photographs it, and notes its condition, layout, and any significant features or deficiencies. They then compare it to recent sales of similar properties nearby, adjusting for differences in size, age, condition, lot size and location.

The result is a written report with a single number: the appraised value. Your lender uses that number, not the purchase price, to calculate how much they will lend you.

In Ontario, the appraisal is typically ordered by the lender after your offer is accepted. Some lenders use automated valuation models for lower risk transactions and skip the in-person visit entirely. You do not get to choose which method they use.

What Happens When the Appraisal Matches

If the appraised value meets or exceeds the purchase price, nothing changes. Your mortgage proceeds as approved. This is the outcome in most transactions, and when it happens you may never even see the appraisal report.

What Happens When It Comes in Low

If the appraised value is lower than the purchase price, your lender will only lend against the lower number. The practical effect is that you need more cash to close.

Here is the arithmetic. Suppose you are buying at $1,000,000 with 20 per cent down. Your mortgage would be $800,000. If the appraisal comes back at $950,000, the lender will lend 80 per cent of $950,000, which is $760,000. You now need $240,000 to close instead of $200,000. That is $40,000 more than you planned for.

At that point you have several options. You can come up with the additional funds. You can ask the seller to reduce the price to the appraised value, although they are under no obligation to agree. You can try a different lender, since appraisal standards vary. Or, if your offer included a financing condition that has not yet been waived, you can walk away.

If you have already waived your financing condition, walking away means forfeiting your deposit and potentially facing a claim for damages. This is the scenario that catches buyers off guard.

Why Appraisals Come in Low

The most common reason is a competitive offer situation. When several buyers bid on the same property, the winning price can exceed what comparable sales support. The appraiser is not interested in what the market was willing to pay in the heat of the moment. They are interested in what similar properties have actually sold for recently.

Other reasons include limited comparable sales in the area, a property with unusual features that do not add measurable value, or a neighbourhood where prices are changing faster than the comparable data can reflect.

What You Can Do Before It Becomes a Problem

The simplest protection is a financing condition. It gives you the right to walk away if your lender will not fund the purchase for any reason, including a low appraisal. In a competitive market where conditions are being waived, that protection disappears, and you are accepting the appraisal risk along with every other risk.

Before you waive a financing condition, ask your mortgage broker or lender whether they expect any issues with the appraised value at your offer price. They cannot guarantee the result, but they can tell you whether the price is significantly above recent comparables, which is where the risk sits.

If you are buying above asking in a multiple offer situation, build a cushion into your finances. Know exactly how much additional cash you could access if the appraisal comes in $30,000 or $50,000 below your purchase price. If you cannot cover that gap, you may not be in a position to waive the condition.

The Bottom Line

An appraisal is not a formality. It is a valuation that determines how much your lender will actually lend you. Most of the time it confirms what everyone already expects. When it does not, the consequences are financial and immediate. Understanding the process before you make an offer is the point at which you still have choices.

If you have questions about how an appraisal might affect your purchase, or you want to understand what comparable sales say about a property you are considering, call me at 416-560-4983 and I will walk you through it.

Danny Macedo, Macedo Real Estate Group, Royal LePage Supreme Realty, Brokerage.