Home Buying in Boston>Question Details

buyer982, Home Buyer in Boston, MA

As a buyer during negotiations, would you recommend agreeing to cover the difference should an appraisal be lower than the purchase price?

Asked by buyer982, Boston, MA Tue Apr 23, 2013

I have heard many buyers offering to do this which makes them more attractive to sellers. And how does this work if
a. the appraisal is still greater than the mortgage needed
and b. if the appraisal is less than the mortgage needed.

Lastly, how does PMI fit in if you were going to put 20% down based on the purchase price and not the appraisal amount.

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Yes, this is a common practice in the rising values market and sellers do prefer offers like that.

How far should you go with this?

The limit should be the market value (whatever you feel the house is worth) and your comfort level.
You still have to be comfortable after shelling money out to cover the "gap" between your appraisal value and the purchase price. By the way, sometimes, after appraisal, the sellers do come down
below the original purchase price - if they want the deal to close or they are under time constraints,
and if there are no back up offers hanging around from the original bidding.

a) If appraisal is greater than the purchase price - you don't have to cover the gap - so your contract wording should allow for that (with the help of your attorney/agent)
b) If appraisal is less than a mortgage - the gap will be paid at closing, the loan amount will be calculated based on the appraisal value, and you'll still need to pay for closing costs and have
some reserves left (you have to ask your lender how many months of reserves you need to have left).

PMI will be eliminated based on 80% LTV (appraisal value).

Hope this helps,

Irina Karan
Beachfront Realty, Inc.
IrinaKaran@gmail.com
2 votes Thank Flag Link Tue Apr 23, 2013
PMI is based on the mortgage not the appraisal.

If your in a sellers market, have the cash, want the property and it appraises for less then you can make up the difference recognizing that another buyer would most likely have to do the same if he were to purchase it for the same price you are, which is below the appraised value. Remember appraised value and market value can differ.

Appraisals are based on a history of the market typically the last 6 months and suppose to take into consideration the current properties available. But lenders typically like to see homes that have sold equal to or above what they are lending you for a similar property.
1 vote Thank Flag Link Tue Apr 23, 2013
The lender will use the lessser of the Appraised value or Sales Price to determine the loan to value as well as the required mortgage insurance.

If the appraisal comes in lower than your accepted offer amount you have 2 choices:

1. increase your down payment. For Example - the accepted offer is $110,000 and the appraisal is $100,000. Your down payment will be 20% of the appraisaed value $20,000 + the difference between the appraised value and Sales Price $10,000. You would need to put down $30,000 to keep your loan to value at 80%.

2. Keep your down payment the same. Using the above numbers your original down payment 20% of $110,000 ($22,000), financing $88,000 of the $110,000. Your loan to Value would be calculated off the appraised value of $100,000 making the Loan to value for the lender 88% would require mortgage Insurance and could impact the interst rate based on loan level price adjustments..
1 vote Thank Flag Link Tue Apr 23, 2013
That's pretty much what I figured. How much have you seen this happening? It seems like in this market, it is a quite likely scenario, would you agree?
Flag Tue Apr 23, 2013
I believe others accurately answered how it works when the appraisal does not meet the offer price, and how PMI is calculated.... I just wanted to chime in that I would not recommend this unless this was an absolute dream home that my buyers or investors planned to be in for a long time riding many market waves. Grossly overpaying can lead to issues if you end up selling in the near future, so be cautious using this strategy. Be sure you have an attorney review your offer.
0 votes Thank Flag Link Tue Apr 23, 2013
As an Exclusive Buyers Agent, I would not recommend this sort of practice to any of my clients! This could have some very bad reputations for the Buyer!
I recommend that you first have your Offer to Purchase accepted. Once the Offer to Purchase is accepted, then the Negotiations can in earnest begin. You should still have a Home Inspection to go through and negotiated before the appraisal is done. Once you accept the home for what it is. Then your can move on to the Appraisal. If the appraisal comes in very low, you can then determine weather you still want to pursue the property. You don’t want to lose the 20% you have saved to avoid the PMI. If you go below the 20 % chances are very good that you WILL be paying PMI which can be costly

I hope that this helps.
If you wish to discuss this further. I can be reached at 508-981-4503
Ron Berquist
0 votes Thank Flag Link Tue Apr 23, 2013
Louis said it best

"If your in a sellers market, have the cash, want the property and it appraises for less then you can make up the difference recognizing that another buyer would most likely have to do the same if he were to purchase it for the same price you are, which is below the appraised value. Remember appraised value and market value can differ. "

Appraisals are behind the market as they look at properties that have SOLD. The market value is truly with the homes that are under agreement . An appraiser looks at the last 8 or 12 months of sales and the market could change by then.
0 votes Thank Flag Link Tue Apr 23, 2013
It would strengthen your offer and help put the seller at ease.

The bigger questions is are your financially prepared to do so? and are you willing to pay more for a house then it is worth?

If he appraisal came in greater hen the purchase price... good for you.

If the appraisal come in below the sale price and you have agreed to cover the gap, you are bringing that extra money a he closing table.

PMI would be calculated at he lower of the appraisal or he purchase price based upon your down payment.

My advice is calm down and find a good agent to work with. You seem to be worked up that you have lost two offers. In hot markets i happens. If you have put your best foot forward and have no regrets, move on. In your lats post you indicated you were disappointed the seller did not come back for highest and best.... If hat upset you that probably means you didn't put your best foot forward from the beginning.
0 votes Thank Flag Link Tue Apr 23, 2013
sooo many different scenarios that can come up when purchasing a house. Sometimes a question can get you 20 different answers and confuse you even more. I think, as already menioned here, that you should get your own experienced buyers agent to help you and represent you and if you have one consult with him/her.
Web Reference: http://wenrealty.com
0 votes Thank Flag Link Tue Apr 23, 2013
Short answer is no. Other wise you have no outs or negotiating power
0 votes Thank Flag Link Tue Apr 23, 2013
But you'll lose the house to the other 15 potential buyers involved in the bidding...
Flag Tue Apr 23, 2013
These are classic questions of someone who is trying to do this by themselves:
The Buyer's Agent is free to the Buyer;
so why would you?
0 votes Thank Flag Link Tue Apr 23, 2013
Your question is very confusing, but I'll try...
No, I wouldn't recommend agreeing to cover the difference...that sounds scary.
a. appraisal is greater than mortgage = good
b. appraisal is less than mortgage needed = buyer pays out of pocket
What kind of loan? If your putting down 20% it should be conventional & you shouldn't have PMI.
0 votes Thank Flag Link Tue Apr 23, 2013
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