Does appraisal need to meet loan amount or total offer? (PMI, interest rate)
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Hi there,
We are in the process of attempting to buy our first home. It has been a roller coaster, and not in a good way. In any case, after submitting an extraordinary (absurd) amount of income documentation our loan application is finally in underwriting and the bank ordered appraisal is being done today. We are worried that we might have made an offer above what the house will appraise for -mainly because it is an unusual property and there aren't a lot of recent comps. We feel what we offered is a fair price considering what the market can bear in the area where the home is located, but unfortunately, if the appraisal comes in low we don't have any extra cash to negotiate with if the seller is unwilling to come down on the price.
Anyway, my question is whether the appraisal has to meet the actual offer price, or if it just needs to be equal or more than the loan amount requested. The latter is what makes sense to me (since that is what the bank would need to make back in case of default) but everything I've read online suggests that it has to meet the full offer. We are requesting a loan for 78% of the offer price, and I'm sure it will appraise for more than that.
It depends on your down payment. On a program where the lender is requiring 5% down or 3.5% down or 10% down (basically, any percentage), then the house must appraise for the sales price in order for you to get the loan for the specific amount of down payment.
If you came up with your own criteria, like this 22% down thing, then it only needs to meet the loan amount, as long as you're willing to pay the difference in cash... but if you keep at that loan amount, it will no longer be 22% down. It's all about percentages and not actual dollar amounts.
Thank you for responding but I'm not sure I understand what you're saying. (Sorry for being dense!)
We chose the amount of our down payment with a view toward our loan amount. We wanted to hit the 417K limit for the loan, so we allocated the rest for our down payment. It came out to 22% of the offer. The lender has never talked to us about a requirement.
To put numbers on it, we offered 540K and are putting 123K down. If the house appraises for 417K or more, are we good? Or does it need to appraise for a value within some percentage of 540K?
I understand that if it comes in low we would need to renegotiate or pay the difference but I am just trying to assess the likelihood. If the threshold we need to meet is 417K then it won't be a problem.
Thanks!
Amy
It needs to appraise for what you qualify for. Since you put numbers to it, this should make more sense.
If your lender requires a minimum of 5% down, the house would need to appraise at $438,000 for you to put 5% down and still be under the $417k limit.
If your lender requires a minimum of 10% down, the house would need to appraise at $463,000 for you to put down 10% and still be under the $417k limit.
If your lender requires a minimum of 20% down, the house would need to appraise at $521,000 for you to put down 20% and still be under the $417k limit.
Do you see how that works? You need to find out from your lender the minimum amount for a down payment they will require. Here's another example, if your lender requires a minimum of 20% down and the house only appraises for $515,000, your loan amount cannot be more than $412,000. They would not finance $417k in this example because they are requiring 20% down from the appraised amount. If the seller doesn't reduce their price, you would have to bring the difference to closing. Does that make sense?
Thank you, I think I get how it works now! But I still have a question, which is, if the point of the appraisal is for the bank to assess whether they will be able to make their money back, then why does it matter if it appraises for the amount of the offer? Don't they only have to make back what I actually borrow?
There are two considerations in a mortgage loan application: credit and collateral. The weaker one is, the stronger the other must me. The lender always will use the lower of the sales price or the appraised value for all calculations for down payment, underwriting an interest rate. So, if you agree to pay above appraised value, that's between you and the seller. The bank is going with the lesser amount. So, in your example above, you would be requesting a 100% LTV loan, despite the fact you poured 123K into the transaction. Chances are you wouldn't find it and would have to put down antoher $20,850. And even though now you have 143K++ - your rate would be priced as a 5% down loan and would contain the PMI of a 5% down loan.
Thank you, I think I get how it works now! But I still have a question, which is, if the point of the appraisal is for the bank to assess whether they will be able to make their money back, then why does it matter if it appraises for the amount of the offer? Don't they only have to make back what I actually borrow?
They need to ensure that if you foreclose on the property, they can resell it quickly. They are also likely selling the loan to investors and want to make the 'package' as attractive as possible.
The appraised value needs to come in at purchase price. That is where the process starts. THEN you can determine what your loan amount etc. will be (20% or whatever of that) Whatever is lower, appraised value or purchase price I should say.
If you offered 200K and it came in at 180K, the seller would either accept 180K as the purchase price, renegotiate with you, have you pay some cash over or kill the deal.
To your question why does it matter of it appraises for the amount of the offer, don't they only have to make back what you actually borrow - well for the same reason, that they don't loan you 100% - AND also, that's why the more money you put down the better the rates are, there is less risk to the investor.
There are two considerations in a mortgage loan application: credit and collateral. The weaker one is, the stronger the other must me. The lender always will use the lower of the sales price or the appraised value for all calculations for down payment, underwriting an interest rate. So, if you agree to pay above appraised value, that's between you and the seller. The bank is going with the lesser amount. So, in your example above, you would be requesting a 100% LTV loan, despite the fact you poured 123K into the transaction. Chances are you wouldn't find it and would have to put down antoher $20,850. And even though now you have 143K++ - your rate would be priced as a 5% down loan and would contain the PMI of a 5% down loan.
Ok now this is confusing..perhaps I am reading it wrong or the language is throwing me off, but why would OP have to go for a 100% LTV loan?
IF the numbers as stated in her scenario are true, the offer was for $ 540K. She is putting down $ 123K as a downpayment which is more than 20% (20% of 540K comes to $ 108K, my math can't be that off..). So technically, she is actually putting in an extra $15K over the minimum 20% downpayment most banks require (or want, if she is getting an FHA Loan, she would only have to put down a min of 3%).
If the house appraised for less than $540K, then she just needs to either kick in more $$ or have the seller reduce the price..Lets assume the house appraises for $ 500K and seller agrees to drops the price to that much. So then her $123K would cover the 20% DP (100K) and 23K extra toward either the DP or maybe closing costs..Her new mortgage/loan would be $ 377K. Why would she have PMI under this scenario if she kicked in at least 20% DP? Doesnt PMI only apply when the LTV is over 80%? Now I am confused...
I am doing an FHA loan and I am buying the house for $125.000 putting 3.5% down, what does the home need to appraise for?
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