Options Available When an Appraisal
Value Comes Back Low
Not necessarily. There are options that might be available in this scenario. Each must be considered then weighed as to the benefit they might offer.
There are a few things that a buyer/borrower should know and understand when confronted with this situation ...
First, there are many reasons a home’s appraisal might come in low, but right now the accelerating housing market is often the cause. A seller's market, such as the current one, with competitive and rising housing prices presents very real challenges to real estate appraisers.
But the following, as they pertain to the financing of a property, are also vitally important to know and understand:
- LTV = "Loan-to-Value"
- LTV is defined as: The relationship between the Principal Balance of the mortgage and the Appraised Value, (or Sales Price, Whichever is lower)
- With this specific scenario, it is the Appraised Value that must be considered (Lower than Purchase Price)
At Application and BEFORE Appraisal is completed:
- Purchase Price: $300,000
- Original Loan Amount applied for: $240,000
- Original Down Payment percentage: 20%
- No Private Mortgage Insurance (PMI) required
- Current LTV (Loan-to-Value) = 80% of Purchase Price
- Scenario 1:
That LTV would require Borrowers, if they choose to proceed, to carry Private Mortgage Insurance (PMI) for the purchase. Their monthly mortgage payment increases by the cost of that PMI (OR they can buy it out in one larger payment at closing called Single Premium Borrower Paid PMI. Contact me for details.)
- Scenario 2:
- Provide a larger down payment to avoid PMI - AND agreeing to pay $300,000
- Recognize the 80% Loan-to-Value is based upon the lower Appraised Value (280,000) received
- Still make a 20% down payment. 80% of $280,000 is now $224,000, so an additional $16,000 down payment is needed
- Down payment now becomes:
- Scenario 3:
- The new Purchase Price becomes: $280,000
- 20% down payment becomes: $56,000
- New Mortgage Amount becomes: $224,000
- NO PMI is required for the borrower
- Scenario 4:
A. Assuming no Escalation Clause was agreed upon at the time of contract negotiations
B. Assuming normal Financing Contingency remains in play on the Sales Contract
It must be noted:
- The appraisal left out more appropriate comparable sales
- The appraisal was proven to be in error
- The appraisal was deemed lacking in logic and supportive of the Final Value Estimate
But the bottom line is that a low Appraisal does not have to be a death sentence for a transaction. Options exist that should be analyzed and considered. Negotiations can take place between Buyer and Seller ... and their representatives.
Further, if the Buyer has more than 20% down and the resulting Loan-to-Value (LTV) remains below 80% ... the loan amount can remain the same as at application. Buyers can agree to the original Purchase Price and continue the transaction.
If you find yourself in this situation, the best thing to do is not panic. Consult with your mortgage lender, realtor, and attorney (if applicable) to learn all the options available to you.
Then weigh those options as they reflect on your short-term and long-term goals. Make your decision accordingly.
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