Rebecca Richardson - Mortgage Consultant
3 Things You Can Do When the Appraisal Value is Lower Than Expected
It’s no secret that in our current housing environment, there is limited inventory.
And as the buyer, this has a big impact on your home buying journey. Specifically, this is causing a lot of competition and some appraisals coming in lower than the sales price.
To recap, the appraisal is an estimation of a home’s current market value by a licensed appraiser. This is a core component of the closing process. The appraiser then shares their estimation with the involved parties. In the current market, when demand is high and supply is low, we can see that the market is outpacing the data needed for an appraisal to support that sales price.
So what does that mean for the buyer?
Now, buyers like you are expected to pay even higher prices, just to be considered.
When this happens, there are three action steps you can take to become a confident buyer.
As an example, let’s say the sales price for a home is $300,000 and the plan at the beginning is to have a 90% loan to value which means having a loan of $270,000 and down payment of $30,000. Now, let’s assume the appraisal comes back at $285,000.
Before we dive into the options, let’s go over what mortgage insurance is. Typically, borrowers who make a down payment of less than 20% will need to pay for mortgage insurance if they are using Conventional financing. Mortgage insurance is always required on FHA or USDA loans. The goal is to lower the risk to the lender who is loaning the money to you so you can qualify for it in the first place.
1. The first option would be to raise the down payment. This means putting more money down to keep the loan to value at the 90%. In our scenario, that would translate to a $265,000 loan amount and a $43,500 down payment versus the originally planned $30,000.
Sometimes that’s required because of the property type, the purchase type, or to keep the mortgage insurance the same.
2. The second option is to keep the loan amount the same. In our example, this would be the original $270,000. However, because the appraisal came in at $285,000, the loan to value is going to be based on the sales price or the appraised value, whichever is less. In this case, it will change from a 90% loan to value to a 95% loan to value. Ultimately, this has a big impact on the mortgage insurance rate.
3. The third option is to renegotiate the sales price. Ask your seller if they are willing to lower their price or match the appraised value. They may be receptive to meeting in the middle with a higher down payment or an adjusted mortgage insurance rate.
I know it can be very distressing when the appraisal amount doesn’t match that of the price of the home on the market.
There typically is a solution available and as a team, we can find a way to navigate your situation.
If you have any additional questions about the closing process and how the appraisal value fits in, you can contact me by emailing (firstname.lastname@example.org) or finding me on Instagram (@the.mortgage.mentor).