My appraisal came in low/high. ..How lenders establish loan amounts when contract and appraisal don’t match up…
from one of our favorite mortgage voices, David Reed, CD Reed Mortgage Bankers, Austin
I’m a little surprised this issue has come up on three different occasions over the past month: the issue of the appraisal not coming in at the sales price of the home.
An appraiser’s job is to establish the market value of a property based on the contract price of the home compared with recently sold and listed properties.
Most often the appraisal comes in at the sales price. But sometimes it doesn’t. Let’s first look at what happens when an appraisal comes in higher than the sales price.
I got a call from someone looking to buy a house that was appraised at $285,000 and the sales price was $225,000. The potential buyer was surprised to find out that the “equity” in the property wouldn’t be transferred to him in the form of his down payment.
He was assuming the difference in appraised value and contract price would be his minimum 20% down payment. He didn’t have any funds for down payment and was certainly dejected that he couldn’t qualify for a mortgage without down payment money.
Lenders will use the lower of the sales price or appraised value for the purposes of establishing a maximum loan amount. In this case, the lender would use $225,000, the contract price. The buyer would then base his down payment on that amount, not the $285,000 “appraised value.”
Buyers can’t assume equity in a property until 12 months have passed since the original sales date.
In the same fashion, if an appraisal comes in below the sales price, the lender would base the loan amount on the appraisal and not the contract.
I had a deal where the contract price was $849,000 but the appraisal indicated the value was closer to $825,000. The comps were legitimate, nearby and recent.
We based the loan amount on $825,000 and not the $849,000. If the buyers wanted to still buy the property at $849,000 they would have to come in with the difference of $849,000 and $825,000 in addition to their down payment.
If the borrowers were putting down 20% they would have to put down 20% of $825,000 plus another $24,000 (the difference between sales price and appraised value)
Lenders view appraisals in this way as if they had to foreclose on the property would they then automatically be “upside down?” The appraisal indicated the current market suggested an $825,000 amount and not $849,000.
Remember: the lower of sales price or appraised value.
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