We have a buyer who is willing to offer $450,000 for a property with 10% down.
The problem is that, according to her agent, “the property will never appraise for more than $380,000, because there are no comparable sales anywhere above $380,000.” There are also cash offers so the seller will not renegotiate if the appraisal comes in low.
Propose Alternative Financing To Buyer
A solution in this situation is to change the financing from 10% down conventional to 3.5% down FHA. And to carefully explain the repercussions to the borrower from the start. This is something we do all the time when we know a property will not appraise.
Cash To Close
With 10% down conventional and an appraisal at the contract price, the “cash to close” will be about $55,000 (down payment and closing costs). To keep the same 10% down terms at the lower appraised value, the cash to close jumps up to $108,000 (10% of the appraised value is $38,000 + the $70,000 shortfall).
With 3.5% down FHA and a $380,000 “low” appraisal, the “cash to close” will be about $83,000 (with a lender credit for closing costs). The appraisal shortfall is $70,000, and the FHA down payment (3.5% of $380,000) will be about $13,000, for a total of $83,000. We can increase the rate a little and offer a lender credit to cover closing costs.
Payment
The FHA scenario will result in a payment that is about $100 to $150 higher per month than the conventional scenario. But, buyers can always refinance later.
Upfront MIP
With the FHA financing, buyers have to pay upfront MIP too, which is substantial (about $6,500 in this example) and non-refundable. But, it is largely offset by the lender credit for closing costs, and it is just something that might be necessary if the buyer, with limited cash, really wants this home.
Refi Into Conventional In Six Months
We have employed the above solution numerous times over the years, and almost every time the buyers were able to refinance into a conventional loan at no cost within six to eighteen months. This is because their purchase set a new price ceiling and helped other properties appraise for more, which helped the neighborhood appreciate in general. Once there is enough appreciation, buyers can usually refinance into more favorable financing.
