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Covering Appraisal Shortfalls

a real estate agent looks at paperwork of appraisal comps in a empty house for sale while her clients, a pregnant couple, tour the home behind herWhenever the market heats up like this, particularly in the springtime, appraisals invariably come in low.

This is simply b/c there are often no closed comparable sales (comps) that even come close to supporting current contract prices, especially when there are bidding wars.

REMINDER: Appraisers can only use comps that close prior to the appraiser’s inspection or appraisal date.

If stronger comps close after the date of the appraisal but prior to close of escrow, lenders need to effectively order an entirely new appraisal if they want to take advantage of those higher-priced comps.

WHEN APPRAISALS COME IN LOW AND SELLER WON’T BUDGE

In January, I blogged about 5 Options When Appraisals Come In Low: 1) Rebut the appraisal; 2) Bring in the extra cash necessary to make up the appraisal shortfall; 3) Change financing to a lower down payment option, to free up cash to make up the shortfall; 4) Negotiate a price reduction with the seller; and 5) Order a new appraisal.

Unfortunately, when the market is this hot, sellers refuse to budge on the price when they know there are numerous backup offers in the wings, and rebuttals are often fruitless when there are no comps to be found. Ordering a new appraisal is also very difficult to justify b/c appraisal regulations are so strict.

Hence, the only options remaining are usually: (1) bringing in cash to cover the shortfall; and (2) changing financing to free up cash.

THE MATH (down payment based on appraised value no matter what)

Here is a quick hypothetical based on a $500,000 FHA purchase:

CONTRACT PRICE:$500,000
APPRAISAL:$475,000
SHORTFALL:$25,000
DOWN PAYMENT:$16,625 (3.5% OF $475,000)
ESTIMATED CLOSING COSTS:$15,000
CASH TO CLOSE:$56,625 (down payment + shortfall + closing costs)

WHERE DOES A BUYER GET EXTRA CASH?

Here are some options for the extra cash:

  1. Savings: This is obviously not an option for everyone.
  2. Lender Credits: Lenders can bump the rate to increase the rebate and then credit that extra rebate to the buyers.
  3. Gifts: These need to be from relatives of some sort, but most loan programs are very flexible when it comes to gift funds.
  4. Lower Down Payment: Changing financing to 3.5% down FHA, 5% down, 10% down, or 80/10/10 combo financing is often an option we pursue for buyers who had intended to put more down, e.g. 20%, initially.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167