Financing in Milton>Question Details

Bakerfamily5, Home Buyer in Milton, KY

Can lender choose to use the lesser of the appraised value vs. actual construction cost for the LTV figure?

Asked by Bakerfamily5, Milton, KY Wed Jul 7, 2010

We just moved in to our newly built home and are in the process of converting our construction loan to permanent financing. Our lender is wanting to use the lesser of the appraised value or actual construction cost for the LTV figure. Can they do that? Why wouldn't they just use the appraised value?

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Hi, Baker family,

This is a good illustration of the Golden Rule: "Who ever has the Gold makes the rules."

The bank is not going to give you an inflated "cash out" loan, just because an appraiser says it is worth more than it cost to build. That's how we got into this economic mess in the first place. In most cases, they agree to pay the construction cost UP TO appraised value. If you over-improve the house, they won't likely lend you more than the appraised value either.

If they lend you more than it cost to build it, you reduce your equity, your loan to value ratio increases, which increases the lender's risk.

Doc
Web Reference: http://TellEllen.com
0 votes Thank Flag Link Wed Jul 7, 2010
Keep in mind that the lender is looking for the least amount of risk--therefore they can choose whatever value they wish.
0 votes Thank Flag Link Wed Jul 7, 2010
The lender will always use the lower of the appraised value or construction cost, in a sale they will use sales price or appraised value which ever is less. This has been the standard practice for many years but has been masked in recent past by rapidly escalating values which came to an end over two years ago. Regardless of construction cost the house is worth what it can be sold for, which is what the appraised value is based on, comparable sales. The lender is looking for the lowest risk which = appraised value in this case. This is not an easy fact to accept but is a very common situation in this market.
0 votes Thank Flag Link Wed Jul 7, 2010
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