New home Appraisal came higher then contract price.

Asked by Newhomebuyer, 30041 Wed May 4, 2011

My new home is ready and we are about to close in next two weeks. My lender order appraisal and it came 7k more then what we have our mortgage loan..what is going to happen now..i am newbisss...so need some information

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36
Newhomebuyer, Home Buyer, 30041
Thu May 5, 2011
@John - It would be nice if we can stick with original question.
1 vote
Melanie Gurl…, Agent, Roswell, GA
Thu May 5, 2011
John, of course values change. However, if banks used your logic then they wouldn't have an appraisal done at all. Of course everyone knows that values fluctuate. However, they are trying to ensure as best they can that they are lending money for a purchase that is at least equal to the value of the price the buyer is paying. I would think since you are an Appraiser you would understand this process and how it doesn't effect the buyer's borrowing power/amount. I'm surprised that you don't. I'm also surprised that you don't understand the purpose of the bank ordering an appraisal. You may want to reconsider your answers for this buyer.
Web Reference:  http://www.thegurleyteam.com
1 vote
Melanie Gurl…, Agent, Roswell, GA
Thu May 5, 2011
Dear Newhomebuyer,

All the agents that answered you do not need to worry are ALL correct. The purpose of obtaining an appraisal is to ensure the value of the property you are purchasing is at least the contracted purchase price. The lender/bank needs assurances that if you default on your loan and they have to take the property back and sell it, they will not be upside down.

Your loan amount will not change as your purchase price is not changing. Another nice piece of information that I don't think anyone mentioned is that in this day and age, most appraisers will not stick their necks out and appraise a property higher than the purchase price unless there is very strong comparables supporting a higher value. The appraisers are under strict scrutiny now and underwriting will challenge any appraisal if they are concerned about it being incorrect or possibly fraudulent. The fact that this appraiser gave your property a 7k above value sends a strong message to you as the purchaser that the home is definately worth what you are paying for it and even more! They usually just appraise it at contract price even if they can justify higher value just to be safe.

Congratulations!! You did well!
1 vote
Darrell Hess, Agent, Asheville, NC
Wed May 4, 2011
Congratulations on your new home purchase and sale agreement. As Donna had mentioned your appraisal ordered by your lender is only an issue if it comes in lower then the agreed purchase price. Since it came in higher the home "passed" Kinda like if you get a 90 its an A, but if you get a 97 its still and A. It is always nice to have some built in equity in the home so hats off to your agent and yourself for negotiating a deal below appraised value.
1 vote
Newhomebuyer, Home Buyer, 30041
Mon May 9, 2011
Guess what all, I just got an email from my loan processor that my file is approved by underwritter and also got 100% from final quality review so..I am closing on next monday...yeappp...wowoww....
0 votes
NA, Home Seller, Nowell Court, Springfield, FL
Mon May 9, 2011
A higher appraisal is a good thing. It means you have instant equity! Congrats and enjoy your home.
Web Reference:  http://SellEarth.com
0 votes
Karen Parsons…, Agent, Laguna Beach, CA
Thu May 5, 2011
Hi,

Looks like you've been reassured....and congratulations. All is well and actually you have automatically gotten a $7K equity bonus. The home is worth more than you are paying for it.

congratulations on your new home.

Karen
0 votes
John Potter, , Cook County, IL
Thu May 5, 2011
Okay. You really do not know what is going to happen next. The loan maybe approved, it maybe approved with contingencies, it may be denied even though the appraised value is more than your contract price. The bank is deciding if they want to invest in this business proposal.

What you want is a time and date and place scheduled for closing with how much money if any is required and documentation such as DL or whatever the bank or title company wants that you need to bring. Do you have an attorney that will review documents before you sign because their is a ton of paperwork. Make sure you have a decent title company, sign the paperwork and then work to pay off that debt as soon as possible.

Is that what you want to hear?
Web Reference:  http://uneappraisals.com
0 votes
Newhomebuyer, Home Buyer, 30041
Thu May 5, 2011
@John - It would be nice if we can stick with original question.
0 votes
John Potter, , Cook County, IL
Thu May 5, 2011
Did buyer order an inspection by a home inspector. Even though this is a new house. Even though the city may have signed off for occupancy. An inspector may give a home buyer all kinds of insight into their house.

Here is a question...Did this builder build "Green" That topic is so massive!
0 votes
John Potter, , Cook County, IL
Thu May 5, 2011
Melanie, What is the purpose of a bank ordering an appraisal. That is discussed and agreed to between the client and the appraiser. The bank may have many reasons for ordering an appraisal. Such as the function of this appraisal is to obtain a loan for financing the purchase of a house. Or the bank may order an appraisal for asset management purposes. Banks are failing left and right because they are under capitalized. So should the bank report assets at market or at mart (expense or loan amounts or cost).

The bank is attempting to understand risk. Such as are you in an area conducive to Hurricanes that could blow away our collateral. And if this property is what can we do to mitigate this risk. An appraisal does more than just report value. Just like this appraisal I am working on now that has a restricted covenant in the deed.

Or more appropriate to this buyer in a new house. What may affect the borrower are infrastrucure issues. Such as did the builder float a bond to pay for the sewers that will become due and added on to the borrowers taxes after a period of time. That is forecastable and does affect a borrowers ability to buy. Same thing with an indexed ARM. So tell me Melanie is this market strong or weak. Because the bank wants to know. The value above contract price is no indicator of that.
Web Reference:  http://uneappraisals.com
0 votes
John Potter, , Cook County, IL
Thu May 5, 2011
It does affect the borrowers purchasing power. For one if the LTV is lower then bank required LTV the borrower will have to pay PMI. If they pay PMI that diminishes their disposable income and what they can afford!
0 votes
John Potter, , Cook County, IL
Thu May 5, 2011
FYI here is the definiton of market value.

Market Value is defined by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) as:

Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what they consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.


A contract price may or may not conform to this definition established by FIRREA. This definition is accepted by banks for Transactions requiring banks regulated by the Feds.
0 votes
John Potter, , Cook County, IL
Thu May 5, 2011
Melanie, Where do you get the idea appraisers value houses just at contract price just to be safe? All of that is nonsense. An appraiser will appraise the house for what it is worth regardless of contract price. All of those statements are just generalized ideas that basically contradict the mission or job of an appraiser. And that is to find market value....not distressed value unless it is asked for.
0 votes
John Potter, , Cook County, IL
Thu May 5, 2011
What type of loan is your banker proposing. An ARM or a fixed rate loan? Or is this a negative amortized loan? Loan balance can change and be more than what you paid for the house. So what kind of loan is it? Loan balance can change.
0 votes
John Potter, , Cook County, IL
Thu May 5, 2011
Melanie says if the lendor bank needs to take the property back the bank will not be upside down. When will that happen. In the future I suppose. Since the appraisal is present value not future value. Melanie must be saying that real estate always goes up. Or the borrower will pay down their mortgage enough so the bank does not have a problem the owner does because the owner lost equity not the bank. Bank does not care if owner loses equity just if the bank loses on their loan amount.

So here is a question for Melanie. Give me a value of this property 10 years from now. And tell me the conditons of the borrower ten years from now. For better or for worse?
0 votes
Newhomebuyer, Home Buyer, 30041
Thu May 5, 2011
@Melanie - Thanks for your kind detail. Since, this is first time, I just want to be sure.

Thanks for your valuable information.
0 votes
John Potter, , Cook County, IL
Wed May 4, 2011
You may see your loan amount at $207,000 with an APR that is higher than what you may think. Ask the banker how that happens.
0 votes
John Potter, , Cook County, IL
Wed May 4, 2011
Your loan amount may not change. You will just pay more PMI to the banker. Your monthly will change. Since the money you pay for PMI is just that insurance. You will receive no credit for that PMI payment.

When you want to remove your PMI and your house has 20% equity or LTV then give me a call since another appraisal can be written. As long as you are in a market that is appreciating or stable because if it goes down it will be more difficult in meeting the 20% equity requirement.

More equity... Less risk...More loan amount... more interest to bank... If I were a banker I would rather have a 90% loan with PMI with a good credit borrower than an 80% loan with no PMI.

Best...Pay cash.
Web Reference:  http://uneappraisals.com
0 votes
John Potter, , Cook County, IL
Wed May 4, 2011
If you put less than 20% generally you will pay PMI that is usually expensive. When the value is 20% of the loan balance then you can ask for the PMI to go away. If you put 10% down and have a loan of $207,900 you would need your house to be worth $260,000 for no PMI. As you pay down the loan you will build more equity as long as the market remains stable and does not go down. If the market goes up you will build more equity faster.

Ask the banker how much the PMI is if any? It is called private mortgage insurance. Ask the banker what that is for.

More equity the safer the loan.
Web Reference:  http://uneappraisals.com
0 votes
Gregorio Den…, , San Diego, CA
Wed May 4, 2011
Newhomebuyer,

Do not get confused by what John just posted as he is 100% incorrect. As I stated; your loan amount will not change. $231,000 - 10% = $207,900.

It makes no difference if the appraisal came in higher.
0 votes
John Potter, , Cook County, IL
Wed May 4, 2011
LTV means Loan to Value. It is a percentage of the value. So with your numbers the LTV is on the contract of $231,000. 20% of that is $46,200. Your loan could be no more than $184,800. The appraised value is $238,000 so that helps in reducing the cash you need. Since you have maybe have 3-4% more of value.

So if you put down 10% of contract price that is $23,100. If the bank requires 20% you will need ($46,200-$23,100- $7,000) or $16,100. This is an issue with your banker.

There is no doubt the more equity in the house the safer the loan. Since you the borrower is not so exposed to the up and down of the market. And that holds for the bank too. You need to work it out with your banker.
Web Reference:  http://uneappraisals.com
0 votes
Caroline York, Agent, St Petersburg, FL
Wed May 4, 2011
Maybe I am not answering the right question. I think you asked what is going to happen now that the house appraised at a greater value than your loan. Everyone is talking Loan to Value which is very important to a lender. However, you have locked in to a mortgage rate and a mortgage amount and the appraisal was scheduled by your lender to verify that the property is valued at or above what they are lending. So, the answer to your question is - the next thing is that you go to settlement with a built in equity of $7000. Now can that change? Sure, if prices go down and the value of your property changes then your equity changes as well. But if and until that happens. Enjoy that you are one of the few that purchased the right house for the right price at the right time.
0 votes
Newhomebuyer, Home Buyer, 30041
Wed May 4, 2011
@Denny - Thanks for the explanation...Now, i understood that during my closing i should see my loan amount $207k ...
Thank you,
0 votes
Newhomebuyer, Home Buyer, 30041
Wed May 4, 2011
@John - Can you explain me what is LTV and why am i 7% short?

@Caroline - thanks for th wishes you answer look more positive than John. I am getting mix answer...
0 votes
Gregorio Den…, , San Diego, CA
Wed May 4, 2011
Your loan to value will not change. Lenders use the lower of the appraised value or contract price to determine LTV. If your contract price is $231K with 10% down, your $207,900 loan amount will still be 90% LTV as far as the lender is concerned.

It's good that your appraisal came in higher for your own purposes of knowing you got a good deal, but it will not affect the way your loan is processed.
Web Reference:  http://WeFixRates.Com
0 votes
David Evans, Agent, Cumming, GA
Wed May 4, 2011
You have equity! That is good, you do not need worry, it is only when it appraises for less that you should be concerned...
Web Reference:  http://www.evansallstars.com
0 votes
Caroline York, Agent, St Petersburg, FL
Wed May 4, 2011
Then smile! You just bought a house with $7000 of built in equity. Not something that happens very often in this market. When you are given the keys you will have $30,000 in equity. Combining your 10% with the $7000. What more could a buyer ask for. Congratulations and much success in your new home.
0 votes
John Potter, , Cook County, IL
Wed May 4, 2011
You maybe short about 7%. Depends what this lendor wants for LTV. What did the lendor say?
Web Reference:  http://uneappraisals.com
0 votes
Newhomebuyer, Home Buyer, 30041
Wed May 4, 2011
Yes, My purchase price is $231K and appraise came $238K..and i am doing 10% down with conv loan.
0 votes
Caroline York, Agent, St Petersburg, FL
Wed May 4, 2011
In today's market most banks expect the appraised value of the house to be at or above the purchase price - not the mortgage amount. If your appraisal was $7000 above the purchase price that is excellent. You have just purchased a home that has built in equity of $7000. However, if you purchased the home for $120,000, your mortgage is $100,000 and the appraisal came in at $107,000. That is not good because you just paid too much for the house. Call your lender and find out if they are looking at mortgage amount or sale price. Then you'll know if it is good or bad news.
0 votes
John Potter, , Cook County, IL
Wed May 4, 2011
Hmmm. LTV maybe a question. 7K not much over loan amount for LTV. How much was your downpayment? Tougher guidelines today. Usually need 20-25% LTV unless FHA. Avoid PMI if you can.
Web Reference:  http://uneappraisal.com
0 votes
Maria Teresa…, Agent, Briarcliff Manor, NY
Wed May 4, 2011
Hello. I gather you must be buying this property directly from the builder, without the help of a Realtor. I don't know who is providing your mortgage, but one of the implications of the loan being $7K more than your loan, means that the loan to value ratio s the loan amount divided by the appraised value. If that is more than 80%, you will probably be needing private mortgage insurance until the loan-to-value ratio reaches 80% or five years from the closing date, if the loan is FHA. Talk to your mortgage provider and see what the implications of that appraised value are. Without further details, this is as much as we can help you with. Good luck and enjoy your new home.
0 votes
Heather York, Agent, Alpharetta, GA
Wed May 4, 2011
Hi, you are actually in a good position. You want your appraisal to come back higher then the loan. You have instant equity. The flip side if it came back appraised below loan amount, you would only be able to get a loan for the appraised amount or lower. Great Job!! Many blessings on this exciting new adventure
0 votes
Barbara Mart…, Agent, Alpharetta, GA
Wed May 4, 2011
You are blessed. As long as the appraisal is higher and not lower than the sales price you are good. Your question was about mortgage amount though so I am confused about how much you put down. Follow above guideline and you are fine. If sales price is higher (not mortgage) than the sellers have to come down in price or you have to pay the difference. Your realtor should guide you through this very easily!
0 votes
Donna Sutton, Agent, Shelby, NC
Wed May 4, 2011
I live in NC. I see you are from Atlanta area. I miss home. That is my hometown.
Anyway to answer your concerns. The only time an appraisal is a problem is when your chosen property does not appraise for the price you offered for it. You will be fine and the mortgage company will be pleased that you are going in with some free equity in your home. Congratulations! Donna Sutton, Sutton Realty Pro
0 votes
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