By Rae Oakley, Flyhomes Mortgage
Once you submit an offer on a home, the loan amount is set in stone … right? Well, not exactly.
Mortgage companies can only grant a loan based on the lower of two values: the home’s appraisal value and the purchase price on your contract.
If the appraisal value is lower, you have to make up the difference (or give up the home).
Let’s say you put in an offer on a $600,000 home, planning to put down 5%. That means you’re putting down $30,000 and borrowing $570,000.
Now, the appraisal value comes back at $590,000 … shy of the purchase price you offered.
You can receive a loan that is at most 95% of the lower amount, which in this case is $560,500 ($590,000 x 95%).
The purchase price on your contract is still $600,000 … so your new down payment is $39,500 ($600,000 – $560,500) instead of the planned $30,000.
This situation can leave you scrambling to come up with the difference of $9,500.
However, there are steps that you can take to save your purchase.
Appeal the appraisal
The first thing to know is that your mortgage company is required to give you a free copy of your appraisal report at least 3 days before your closing date. Appraisal reports are official documents that outline all of the comparables (“comps”) and data used in the calculation of the home’s value.
If you believe there’s incorrect information in the report or if you can provide additional comps that are more suited to your home, contact your mortgage lender about an appeal.
The terms and conditions for appealing an appraisal vary across mortgage companies, so be sure to reach out to your loan officer for specifics on how to get started. If you’re working with a real estate agent, he or she can help you with this process as well.
Negotiate with your seller
In competitive markets, many buyers waive their appraisal contingency in order to get their offer accepted. Even if have done this, talk to your real estate agent to discuss potential avenues for closing the gap between the two values. There’s a chance the seller will accommodate a lower purchase price rather than losing the deal entirely.
Restructure your loan terms
We highly recommend that you talk to your mortgage loan officer about options to consider that may reduce the difference. For example, FHA loans can do as little as 3.5% down, and Home Ready and Home Possible programs as low as 3%.
Using the example listed in the introduction, this would put your new loan amount at $590,000 x 97% = $572,300. With the purchase price at $600,000, this would mean your new down payment is $27,700 ($600,000 – $572,300).
There are specific requirements for each loan program, so be sure to touch base with your loan officer on the pros and cons of restructuring your terms.
Switch mortgage lenders
Although appraisals are done through third party providers, it’s possible that a second appraiser will come to a different valuation for your property if you are doing a conventional loan.
Because most mortgage lenders cannot order a second appraisal, consider working with another company. Just know this is not an option for FHA or VA financing, and definitely make sure the new company can close your loan on time.
Want to learn more about appraisals?