Bee | High IQ Buying: A Low Appraisal
December 29, 2022
Bee: High IQ Buying | A Low Appraisal
Appraisals are one of the things a lender doesn't control. By law they are supossed to be done by a completely uninfluenced, independent, third-party professional who provides their opinion for the current market value of the home.
Most of the time they come in high or on the sales price of the home. After all, in a free market value is only determined by what someone is willing to pay for it, so most of the time the contract price matches the appraised value.
But there are the rare occasions where an appraisal comes in lower than the agreed upon sales price of the home. And lot's of times this can kill the deal but you've got a better chance at buying your home if you're working with a mortgage broker, not a lender directly. For context let's dive into why the home value is important.
First of all, the value of the home determines what the loan-to-value, or LTV, is. And LTV determines the rate you get, and if the lender will approve the loan for financing. LTV is calculated by what the loan is to the value of the home. For example, let's say the home you're buying is $100,000 (to make math easy).
The max loan amount you could finance (for the average loan) would be 97% of the value, which would = $97,000.
If a 3% down payment is all you can afford to put down, then you're maxed out on the LTV. If the appraised value comes in lower than $100,000 and the seller refused to lower the sales price of the home, you'll have to put more money down the make up the difference.
Let's say the appraisal came in at $95,000. That means you'd have to put down an additional $2,000 to keep the LTV at 97% or less.
In most scenarios where the appraisal is a little less than the contract price, most sellers agree to lower the sales price of the home. But what if there's a big difference? This is where working with a broker can save your dream home for you, and it happened to us at Bee recently.
We recently had a home that appraised for $160,000 less than the agreed upon sales price of the home. The person that extremely low-balled this appraisal had a bad public reputation for ruining deals by appraising homes drastically less than the contract price. They are an attorney who owns an appraisal service and have many, many complaints.
After the seller refused to lower the sales price, and the buyers understandably refused to pony up more cash for the down payment, we got an extension to close and took the file to another lender who ordered another appraisal. The new appraisal came in $6,000 higher than the contract price.
The first lender offered to order another appraisal, at the buyer's cost of course, but refused to use to higher of the two appraised values. So, what's the point of paying for another appraisal with the same lender? Insanity. This lender is no longer in business, by the way, and it's not hard to understand why.
Had the buyers been working with a lender directly they would of had to find another lender quickly, apply, and get the appraisal rush ordered. But because they were working with us, a mortgage broker, we handled all of that for them, saving their dream home in the process.
The Mortgage Broker Advantage
Buyers who use mortgage brokers have the best chance at closing, period. They have a smoother process and get better rates along with the ability to close faster. There's a reason why the broker model is on the rise as homeownership affordability declines and home buying becomes more expensive.
In many cases, like a low appraisal, mortgage brokers have more resources to fix unexpected problems that might pop up outside of anyone's control. Closings home loans isn't easy or for the faint of heart. It takes a learned skill and the ability to push a team that drags the file over the closing line together.
In the scenario above, had it not been for a very capable real estate agent, and understanding buyers, working together to solve the problem, they would not have closed when they did; and rates skyrocketed right after they closed. Those minutes urgently working a solution meant the buyers saved a lot of money on their loan by locking in a new low rate quickly.