What happens if the appraiser estimates a value of the home that is worth lower than the price in the purchase contract? This can have serious implications for the buyer’s ability to close the deal. Let’s game it out. A lender usually has a maximum loan-to-value ratio that they will accept. Suppose a lender has an LTV tolerance of 95%. The buyer and the seller agree to a purchase contract for a price of $400,000. 95% of $400,000 is $380,000. Theoretically, the lender will loan $380,000, and the buyer will need to put $20,000 down. But let’s say the appraiser comes back and says the house is only worth $360,000. Oops. What happens now? The lender will still only lend that 95% LTV. That means a maximum loan of $342,000. To satisfy the purchase contract at $400k, the buyer now has to come up with $58,000 for a down payment. Ouch. The buyer was expecting to put down $20,000 … now he needs to put down almost three times that amount. What can the buyer do in this situation? What happens if the home does not appraise? If he has the money and really wants the house, he can suck it up and make the bigger down payment. If he doesn’t have the money, he can go to the seller and try to renegotiate the contract for a lower price. If the seller doesn’t agree, however, then the deal may fall through. If contingencies have already expired, the buyer may lose his earnest money deposit. Let’s say, however, that the buyer intended to make a bigger down payment anyway — say, 20% so he doesn’t have to pay PMI (private mortgage insurance, required for down payments below 20%). This buyer plans to put $80,000 down on that $400,000 house and borrow $320,000. If the appraiser comes back with a value of $360,000, the lender will still only agree to lend $342,000 … but that doesn’t matter, because the buyer wasn’t going to borrow that much anyway! He was only going to borrow $320,000. This is just an illustrative example. If you only have the money for a small down payment, be very careful about bidding a home above the value it is likely to appraise for. If you do that, the deal is much more likely to fall apart in financing.
RITA REALTOR | BROKERAGE 904-555-5555 | Rita@realtor.com | www.Authorify.com
LARRY LOAN OFFICER | OFFICE 904-555-1010 | Larry@loans.com | www.Authorify.com
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