Because the market is so “hot”, sellers are refusing to budge on contract prices when appraisals come in low (sellers believe other buyers are waiting in the wings that will pay full price). In this situation, buyers simply have to come in with the extra funds to make up the difference between contract price and the appraised value.
Problems arise when buyers have limited funds. We have a transaction currently that provides a good illustration. The price is $430,000 and the buyers can only put down 10%. The appraisal, however, will probably come in no higher than $410,000 (per the Realtors) and the seller will not budge on price.
The buyers will have no choice but to turn their 90% loan-to-value loan into a 95% loan-to-value loan, and then just take a higher PMI rate. The buyers intended to borrow 90% of $430,000, or $387,000. The buyers will now end up borrowing 95% of $410,000, or $389,500. This will free up enough funds to cover the difference between contract price and appraised value.
The only pain the buyers will suffer in this situation is a slightly higher PMI rate. Because their credit is so strong, the PMI rate will only increase from 0.44% to only 0.59%. This increases their overall housing payment by about $50. This is often the extra price buyers have to pay if they want to close transactions in today’s very competitive market.
Final note: Lenders have no problem with buyers paying more than the appraised value; lenders merely require the buyers to sign a letter that acknowledges the fact.
Founder/Broker | JVM Lending
(925) 855-4491 | DRE# 01524255, NMLS# 335646