Author:
Jordan Lawrence
Published

Strategies for Homebuyers and Real Estate Agents

You’re under contract for a dream house, but then the appraisal comes in low. The seller won’t budge on the price, and you still want to buy. What now? This scenario can be stressful, but there are practical solutions that don’t require you to dip into your savings or back out of the deal. Let’s explore how you can manage a low appraisal effectively with the right lender and strategies.

Understanding the Appraisal Issue

When a house appraises for less than the contract price, it poses a problem. Lenders can only base their loans on the lower of the purchase price or the appraised value. This means if you’re not putting down the minimum payment, your lender can’t simply cover the higher contract price, leaving you to make up the difference. However, you don’t necessarily have to come out of pocket to bridge the gap.

Two Key Solutions for Low Appraisals

1. Monthly PMI Adjustment

One way to handle a low appraisal without increasing your cash to close is by adjusting your monthly Private Mortgage Insurance (PMI). Here’s how it works:

  • Scenario: You’re buying a house for $465,000, but the appraisal comes in at $441,000.
  • Gap: $24,000.
  • Solution: Instead of paying the $24,000 difference upfront, you add a small amount of PMI to your monthly mortgage payments.

For example, if your monthly payment increases by only $41, that’s a manageable increase compared to paying an extra $24,000 upfront. This PMI can be temporary, potentially only lasting for a couple of years if the home appreciates or you pay down the mortgage.

2. Upfront Mortgage Insurance

Another option is to use upfront mortgage insurance to handle the appraisal gap. This involves a slight increase in your cash to close but keeps your monthly payments steady.

  • Upfront Payment: You might pay a few thousand dollars more at closing.
  • Monthly Payments: Remain the same as if the house had appraised at the purchase price.

This strategy is particularly advantageous because you can negotiate with the seller to cover part of this upfront cost, which might be more palatable to them than lowering the house price significantly.

Practical Example

Consider an actual client scenario where:

  • Purchase Price: $465,000
  • Appraised Value: $441,000
  • Appraisal Gap: $24,000

Monthly PMI Solution:

  • Increased Monthly Payment: Only $41 more.
  • Benefit: No need to pay $24,000 upfront, making the gap financially manageable.

Upfront Mortgage Insurance Solution:

  • Slightly Higher Cash to Close: An increase, but potentially covered by seller concessions.
  • Stable Monthly Payment: Remains unchanged from the original plan.

This second option can be particularly appealing if you and your real estate agents can negotiate seller contributions towards the upfront mortgage insurance, effectively reducing your out-of-pocket expenses.

Strategies for Real Estate Agents

If you’re a listing agent and the appraisal comes in low, instead of immediately reducing the house price, consider working with the buyer’s lender to explore these options. This approach can:

  • Minimize Price Reduction: Avoid substantial price cuts.
  • Facilitate Smooth Transactions: Help buyers manage the appraisal gap creatively.
  • Negotiate Effectively: Use seller concessions towards upfront mortgage insurance to make the deal work.

Final Thoughts

A low appraisal doesn’t have to derail your home purchase plans. By leveraging options like monthly PMI adjustments or upfront mortgage insurance, you can navigate these challenges smoothly. Working closely with a knowledgeable lender and proactive real estate agents ensures that you have the flexibility to handle appraisal gaps without significant financial strain.

If you have any questions or need personalized advice on handling low appraisals, feel free to reach out. We’re here to simplify your mortgage experience and help you achieve your homeownership dreams without unnecessary stress.