WHAT HAPPENS IF MY APPRAISAL COMES IN LOW? Regardless of market conditions, a common question we field here at RPM when financing a home is, “What happens if my appraisal comes in low?” So let’s take a minute to cover the relationship between purchase price and appraised value while also providing a few looks into your mortgage options should this dilemma befall your home financing experience. In all of our examples to follow, we’re going to assume a purchase price of $500,000. We’ll change the appraised value of the home to demonstrate what happens to your financing alternatives. Remember this critical point: In a home purchase transaction, your lender will use the lesser of the purchase price or appraised value to determine your loan-to-value (LTV). If you get confused with any of the scenarios to follow, come back to this core concept or get in touch for more help. Our first example involves a purchase price of $500,000, as we mentioned. Let’s say you, the buyer, are putting down 20% or $100,000. The loan amount is $400,000 at an 80% LTV. Now let’s say the appraisal comes in at a value of $475,000. The lender uses the lower amount ($475,000) and we now have an LTV of 84%. In order to achieve an 80% loan-to-value against $475,000, a buyer can take a loan no greater than $380,000. Again, because the purchase price is still at $500,000 and we cannot exceed a loan amount of $380,000, your down payment would need to increase to $120,000 if you wish to avoid private mortgage insurance (PMI) or a piggyback second mortgage. In our second situation, let’s assume that you instead intended to take a loan of $300,000. Against $500,000, this produces and LTV of 60%. Now if our appraisal comes in at $475,000, the LTV is 63%. You can still put down $200,000 with no change to the loan’s structure. The reason you see no change here is because an LTV increase from 60% to 63% crosses no lending guideline threshold, whereas an 80% to 84% increase, as above, does cross the line between needing and avoiding mortgage insurance. Finally, what if the appraisal comes in higher than expected? Well, here too, the lender will revert to the lesser of the purchase price or appraised value, so the LTV would now be based off of the purchase price. Sure, it’s nice to know that an opinion of your home’s value is higher than what you’re paying for it, but unfortunately you can’t capture or monetize this equity at the time of purchase. These are the three most common examples of the relationship between appraised value and purchase price when you are in a home buying situation, but many of these concepts also hold true in the case of a refinance. Having an appraisal come in low often requires a change in strategy, but it certainly does not always imply that your deal is dead on arrival. I’m ready to help if you share this common concern. Christopher Caproni Mortgage Consultant NMLS # 580518 CalBRE License # 01898664 Direct: 415.381.7012 Cell: 415.990.6907 Email: ccaproni@rpm-mtg Website: rpm-mtg/ccaproni 1058 Redwood Highway, Frontage Road Mill Valley, CA 94941 RPM Mortgage, Inc - CalBRE# 01818035 – NMLS# 9472 - CA Bureau of Real Estate, Real Estate Corporation License. Equal Housing Opportunity.
Posted on: Tue, 29 Jul 2014 23:07:06 +0000
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