Gene's Chicagoland Mortgage Blog: Options Available When an Appraisal Value Comes Back Low

Options Available When an Appraisal

Value Comes Back Low

For home buyers (and sellers), receiving a low appraisal can seem like a major catastrophe to confront during a home transaction.

But does it have to be?

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)

An example of the problem(s) raised during this low appraised value scenario follows below. (Multiple solution options are offered as well)

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

How the scenario can change if the Appraisal Comes Back in at $280,000 ($20K under price)

Scenario 1:

Value is now $280,000. If loan amount stays at $240,000 the new Loan-to-Value (LTV) becomes 85.7%.

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:

The Borrower can elect to:

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:

$300,000 minus $224,000 = $76,000

Scenario 3:

The Buyer and Seller renegotiate the Contract Price to align with the Appraised Value:

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:

Borrower cancels the Contract

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:

Most appraisals can be "appealed", if the participating parties agree that:

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

However ... there is NO guaranty of the Appraiser changing the value after the review has been performed.

It must also be noted: In most cases, mortgage lenders do not have direct contact with or access to the real estate appraiser conducting the appraisal. The low-value appraisal problem cannot be addressed by simply ordering another or new appraisal.

By Regulations, mortgage lenders are required to order their appraisals through an Appraisal Management Company (known as an AMC). Appraisal orders are conducted in this manner so there is a level of independence maintained and no undue outside influence is exerted upon the Appraiser.

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.

Are you hoping to Buy, Refinance or purchase an Investment Property in New Lenox, Will County, or elsewhere in the Chicagoland area/IL/WI?

Looking for mortgage financing answers, options, solutions, and experienced assistance?

Contact me! I'll put my 40+ years of Mortgage experience and expertise hard to work on your behalf.
I'm easily found at:

Gene Mundt

Mortgage Originator -NMLS #216987 - IL Lic. 031.0006220 - WI Licensed

American Portfolio Mortgage Corp