When you apply for a mortgage, the bank has a professional appraiser perform an appraisal of the property. The question today is: what if the appraisal comes in lower than the price you have agreed to pay? And the answer, like the answer to many questions, is: “It depends”. Mostly, it depends on what it says in the mortgage contingency that was part of your offer.

For the purposes of this discussion we will use – as an example – that:
– you have agreed to pay $600k for the property.
– the bank will lend you up to 80% of the appraised value – which is standard.

1. My mortgage contingency says I will finance 80% of the purchase price.

This means – in our example – that your signed offer says the purchase is contingent on your “financing” or “borrowing” or “getting a mortgage” for $480k (i.e. 80% of the purchase price).  It also means that you are planning to put down $120k of your own funds. If the property appraises at less than $600k, then the bank will lend you only 80% of the appraised value. This will be less than $480k.  In other words, the lender is rejecting your request to borrow the full $480k. In this case, you can exercise your mortgage contingency, get your deposit back, and withdraw from the purchase.

2. My mortgage contingency says I will finance less than 80% of the purchase price

For example, you wrote in the contingency that you will finance 50% of the purchase price fo $600k. . That means you are planning to borrow $300k and put down $300k. The property has to appraise at only $375k in order to get the planned mortgage, because the bank will lend you 80% of $375k, or $300k.

 

You can easily calculate how much the appraisal must be so that the 80% that the bank will lend you covers your mortgage contingency.  (Hint: divide the amount to be financed by .8) The bottom line is that the property can appraise for less than the purchase price, and your contingency won’t apply as long as the bank will lend you what you committed to financing.  So what happens in a case like this? Nothing different than if it appraised at the purchase price.

3. The property appraisal is lower than the purchase price – am I overpaying?

Not necessarily.  The bank appraisers use guidelines that are intended to err on the side of appraising low rather than high in order to protect the bank from getting burned if they have to foreclose.  A designer house in the South End – the only townhouse from the entire Boston area that was featured in a coffee table book about townhouses – didn’t appraise at the purchase. It had a few stories of open floor plans and the appraiser had to treat it as a one bedroom thereby limiting the appraised value.  I had a case with a house on a big piece of land where the appraiser inadvertently left out the line item for the extra land and its value from the appraisal calculations. And there are many other reasons that can account for low appraisal in addition to the possibility that you are overpaying.

4. The property appraisal is too low for my mortgage contingency, but I still want to buy

1 – You can try to negotiate the price down by showing the seller the letter from the bank saying they rejected your mortgage application at the currently agreed-upon price.  

2 – You can put down more money.  If you were going to put down $180k and borrow $420k, but the bank will lend you only $400k, you can put down $200k and go through with the purchase.  

3 – You can do a combination of 1 and 2 above…negotiate down and increase your down payment until the numbers all add up.

 

Chris Kostopoulos can help you with buying and selling property.  He can certainly answer questions about appraisals.  You can contact Chris by phone at 857-829-0282 or email him at Chris@Isellmass.com

 

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