May 23, 2017
Most homes in areas that Orion covers are appreciating. But there are still occasional appraisal questions. If an appraisal comes in below the value required, the first possible action is to establish if there are any existing comparable properties, not used by the appraiser, to appeal the value in the report. But if the appeal is denied and the value stands, what are the options available to our broker’s clients?
On a purchase transaction, borrowers, regardless of lender, have four basic options. Let’s use the following example for illustration: an Orion’s broker’s client has a purchase price of $425,000 and the appraisal comes in at $400,000.
One of the primary guidelines for pricing is the loan to value (LTV). For lending purposes, the LTV is based on the lower of the purchase price or the appraised value. In the instance above, the loan to value will be based on $400,000 not $425,000. This means if the borrower was putting down 20% on $425,000, they wrote the offer to purchase the property with a loan of $340,000. When the appraisal came back with a value of $400,000 the LTV of 80% is now 85% if you retain the loan amount of $340,000.
The first option is where the client agrees to pay $425,000. If they retain the loan amount of $340,000, the client will have the same down payment: $85,000. But they will now have a loan that requires mortgage insurance since it is greater than 80% LTV, adding to the monthly payment. How much depends on the type of mortgage insurance the client chooses. Or they can choose to increase the down payment by $20,000 which will bring the loan amount down to $320,000 and 80% of the value of the appraisal.
The second option is that the Seller agrees to lower the price to the appraised value of $400,000. The client puts 20% down on the $400,000 and the loan amount is adjusted to $320,000. The third option is where the client and the Seller meet somewhere between the appraised value of $400,000 and the original sales price of $425,000. This option may require a broker’s client to make some additional down payment to avoid mortgage insurance. And the last option is that the client walks away from the transaction.