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Don't Lose Home Over Low Appraisal

Ginny,  I am in contract on a property that had an asking price of $159,000. My offer of $145,000 was accepted. The bank appraisal came in at $135,000, and the seller lowered the price to $141,000. Should I stick with the bank appraisal of the property? The contract is contingent on financing, so in order to finance this property I would have to make up the difference with the downpayment. — Maia A., Denver, CO

Maia, given that appraisals are notoriously conservative right now, resulting in homes frequently being undervalued, your situation is not at all unusual. What you should do next depends on three simple items: what you can afford; what the place is actually worth in your opinion; and what the place is worth to you.

One thing, first. My assumption is that the negotiation flow went something like this: You made your offer, the seller accepted it, the appraisal came in low, you notified the seller, and she agreed to reduce the price to $141,000.

If you’re concerned about the gap that still exists — the $6,000 difference between $135,000 and $141,000 — there’s nothing saying you can’t go back and request the seller to come down a bit more, or even offer to meet her halfway. All she can say is no, and even in that worst-case scenario, you’re no worse off than your current position. But at least you’ll have tried!

Now on to the three criteria you should factor in to your decision. First up: what you can afford. Your original offer — the price you were originally prepared to pay — was actually higher than the price the seller is currently willing to accept, so I’ll assume that you can afford the monthly payment at that overall purchase price.

However, as you know, your bank will lend your approved loan-to-value ratio on the appraised amount only, even if it’s lower than the sale price.
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So, for example, if you were planning to put down only 3.5 percent of $145,000 on an FHA loan, or $5,075, under the current terms, you would have to more than double your downpayment — coming up with the $6,000 difference on top of your original downpayment.

If, on the other hand, you were planning to put down at least $6,000 over the bare-minimum downpayment, your bank may allow you to simply redirect some of those funds to fill in the gap. This could change your monthly payment, but that change is likely to be slight.

The one possible item that could impact your affordability much more significantly is if you were planning to put 20 percent down, and the redirection of that $6,000 gap pushes your downpayment below the 20 percent mark. If that were the case, and you didn’t have enough extra cash to fill the gap and still put 20 percent down, this gap would require you to pay for a private mortgage insurance (PMI) policy you wouldn’t otherwise have had.

And PMI isn’t exactly cheap — if you are getting an FHA loan you’d incur a $1,300 flat fee (called up-front mortgage insurance premium, even though it can be rolled into the loan and paid over time), and about $100 a month on top of that (based on new FHA guidelines that went into effect Sept. 7).

On a non-FHA loan, you’d probably be talking about just the $100 per month. You’d have to pay this PMI for at least five years (FHA) or until you can document that you have 20 percent of equity in the home (non-FHA). You can see how filling in the gap to get to the seller’s $141,000 might actually cost you a lot more than the $6,000 — if, that is, it stops you from making a 20 percent downpayment you would otherwise have been able to make.

Beyond the issue of whether you have the cash to bridge the gap and can afford to do so without jacking your payment up due to PMI, you also need to consider whether you feel the home is worth the extra $6,000.

I can already imagine some folks citing the official definition of an appraisal to say, “If the appraiser says it’s worth $135,000, then that’s all it’s worth!” But that would be an extremely naive statement.

As we’ve discussed many times in this column, appraisers are under the gun and under some very tough guidelines right now — they are being extremely conservative, nationwide. What the appraisal means is that the specific comps that specific appraiser found upheld that value.

It’s possible — and even common these days — for buyers and sellers in your sort of transaction to strongly disagree with a low value. If you feel the home is worth more, for whatever reason, then it may not be bizarre to pay the extra $6,000.

Finally, and most importantly, what is the place worth to you? Put differently — how badly do you want it? Would you regret paying the $6,000 more or less than losing the home?

If you, like so many of today’s buyers, have seen dozens of homes, been outbid multiple times and this home is a great fit for your family, your finances and your lifestyle — even at the $141,000 — go for it!

Take your real estate agent and mortgage broker’s opinions and advice, locally relevant as it is, into consideration, then make the decision that will cause you the least regret.