Thursday, October 10, 2013

Purchase "bad appraisal" now what?

What Happens When A Home Appraises For Less Than Its Purchase Price?

Another home appraisal function is to help set your downpayment amount on a purchase.
Mortgage lenders use home appraisals as the "value" portion of the your mortgage's loan-to-value (LTV) calculation, where "value" is equal to the lower of your home's purchase price or its appraised value.
For example, if you purchase a $410,000 condo in Chicago, Illinois with an appraised value of $400,000, and you plan to make a 3.5 percent downpayment via the FHA, your required downpayment amount is fourteen thousand dollars.
Conversely, if your home appraises for more than the purchase price, the required downpayment amount is $14,350.
When your home appraises for less than its purchase price, there are three potential outcomes :
  1. Buyer and seller renegotiate a new, lower home sale price
  2. Buyer increases downpayment to meet new LTV and downpayment minimums
  3. Buyer chooses neither option, and cancels home purchase contract
The possibility of a "bad appraisal" is among the reasons why the majority of home purchase contracts are written with an appraisal contingency. In the event that the home fails to appraise for its purchase price, the contingency clause gives buyers an opportunity to re-evaluate.
Appraisal contingencies are also sometimes used to renegotiate or exit contracts after an appraiser identifies required repairs, such as chipped paint or cracked windows.

How Much Home Can You Afford?

For today's home buyers, a home's appraised value is unlikely to fall short of its sale price. This is because buyers and sellers are more savvy about the "going price of a home" in 2013, and because U.S. housing markets have exhibited steady growth since late-2011.
Home appraisers are likely to consider both factors when assigning a home's Fair Market Value.
If you plan to buy a home in 2013 or 2014, consider your household budget and your expected home downpayment. An appraisal can change your math, and so can rising home prices. See how much home you can afford -- it's free and there's no obligation whatsoever.

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