Exercising Financing Contingency in an unusual situation (contingencies, appraisal, clause)
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I'm under contract on a bank-owned house that is in rough shape and needs a lot of work to make it habitable. I applied for a conventional Fannie Mae homestyle reno loan, found a contractor and got a bid worked up, and got the appraisal. I was concerned the appraisal would not come back high enough to support the reno price + 10% contingency + fees (under this loan you can borrow up to 50% of the ARV). I needed the appraisal to come back at $185,000 and I told my lender there was no way this was going to happen, but she said to get the appraisal anyway and we'd adjust from there.
Well, it came back at $147,000! We're all shocked, but after talking to the appraiser they say there's nothing to be done about it. Because of the low appraisal I can't get the Homestyle loan - scaling back on the reno would lower the ARV which in turn would lower the amount I can borrow - rinse and repeat - so the lender recommends switching to an FHA 203K which allows me to borrow up to 110% of the appraised value. The problem with this is that I'll end up upside down to the tune of ~$15-20k from the get go!
I think that if I am being told I can't get the loan I applied for because the property doesn't support it that I can back out based on the financing contingency (which states the sale is contingent on me getting the FNMA Homestyle loan). My lender says because *I* am approved (in other words, I'm credit-worthy and make enough money), she doesn't think she can say my loan is being denied . . . but they aren't going to give me that loan so I'm not sure I understand her. My point is that I am credit-worthy, but the house is not.
My lender is going to ask the underwriter and my agent is going to talk to the listing agent. I put $3000 down as earnest money so I'd really like to get that back.
Anyone have experience with the finer points of financing contingencies? Thanks!
My understanding is that it is not eligible for a regular conventional loan because the house is not habitable. My lender won't give me a loan unless it is either first brought to habitable condition, which the seller (Wells Fargo) won't do OR unless I do a renovation loan. I could keep the conventional FNMA Homestyle Loan if I put up another $19,000 on top of my current downpayment and closing costs.
The waters are murky on this one because technically, it's the appraisal that's throwing everything off, but the appraisal is actually $71,000 higher than my purchase price, but it is a post-renovation appraisal. Because of this, I don't think I can exercise the appraisal contingency. But it is this value that means I can't use the loan product I have written into my contract.
This is my first time buying a home and knowing what I know now I would have included a contingency for the house appraising to cover the purchase and renovation, but it's too late for that. My lender and her renovation loan specialist both said they have not seen this happen - every other loan they've done like this has appraised at or above the cost of purchase + renovation.
My understanding is that it is not eligible for a regular conventional loan because the house is not habitable. My lender won't give me a loan unless it is either first brought to habitable condition, which the seller (Wells Fargo) won't do OR unless I do a renovation loan. I could keep the conventional FNMA Homestyle Loan if I put up another $19,000 on top of my current downpayment and closing costs.
The waters are murky on this one because technically, it's the appraisal that's throwing everything off, but the appraisal is actually $71,000 higher than my purchase price, but it is a post-renovation appraisal. Because of this, I don't think I can exercise the appraisal contingency. But it is this value that means I can't use the loan product I have written into my contract.
This is my first time buying a home and knowing what I know now I would have included a contingency for the house appraising to cover the purchase and renovation, but it's too late for that. My lender and her renovation loan specialist both said they have not seen this happen - every other loan they've done like this has appraised at or above the cost of purchase + renovation.
I've never had a reno loan not appraise at post remodel value or higher either.
We have a clause here that states that the property has to qualify for financing so you would be able to get out of it out here, but you will have to have your agent or attorney look over your contract.
Can't you try and negotiate the purchase price down to accommodate the failure to appraise post reno?
Thanks Silverfall. Everyone was surprised when it came back so much less than expected. I truly don't think the appraiser understood the scope of the work although I also don't think the lender should have expected it to appraise as high as it needed to. I expected $165,000 based on the comps in the area.
I think I will ask my agent to explain the issue and see if the selling bank will come down in price - that's the only way I can move forward, but if that fails I will need an escape. I believe the "This contract is contingent on Buyer obtaining a loan as specified below: FNMA Homestyle Renovation," should cover both my inability to secure financing and also the property's inability. My agent and the listing agent are in the same office so I hope they can have a conversation soon. I got the appraisal at 4:58pm on Friday so today was the first day I could talk to anyone and we've all been somewhat affected by Irma today (my other escape is the dead tree right in front of the house coming down on it) so there hasn't been much conversation. In the meantime, I waited weeks for the bids, 2 weeks for the appraisal, and have spent $450 on a HUD inspection, which is required for the loan, and $550 on the appraisal and still have $3000 in EM out there.
Perhaps I can use the wood infestation clause - we signed the purchase contract on 8/2 and the seller was supposed to get a termite/wood infestation inspection and despite me asking repeatedly, it still hasn't happened. There's not date in the contract though so I guess that won't hold water!
If they're not giving you the loan you *specified* in the purchase agreement, that's a denial- full stop, end of story.
demand your rejection letter & exercise your appraisal contingency.
Too many amateur lawyers in the henhouse. Your lenders job isn't to interpret your purchase agreement, it's to approve or deny the loan. Can't approve = deny.
Zippyman - that's exactly what I think. It defeats me as to why my lender is saying she doesn't know if she can deny the loan because *I* am through underwriting. Yeah, I might be, but the property also has to make it through and it clearly hasn't if you say my only option is to switch to a different loan product. At 10 this morning she said she'd ask the underwriter and then crickets. Sigh.
Zippyman - that's exactly what I think. It defeats me as to why my lender is saying she doesn't know if she can deny the loan because *I* am through underwriting. Yeah, I might be, but the property also has to make it through and it clearly hasn't if you say my only option is to switch to a different loan product. At 10 this morning she said she'd ask the underwriter and then crickets. Sigh.
She can ask the underwriter for an approval & if they won't give it, she needs to promptly give you a denial letter. Light up your agent as well - this is part of their job, to act in your best interests & advocate on your behalf. Once you have a financing denial, then you can re-negotiate or walk. The seller/bank needs to be notified of the insufficient appraisal promptly, or they'll likely fight returning the earnest money. If your agent advocates carefully on your behalf, you might salvage the deal or have the option of walking.
The seller is under no obligation to match the appraisal, but if it's a roughed-up house, they'd be kinda dumb not to.
Does your financing contingency include any reference to a specific dollar amount or language related to the appraisal supporting the amount needed to finance and renovate the house? That kind of language could be your out if it's worded correctly.
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