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The Real Estate Adviser

Guard yourself against appraisal shortfalls

Dear Steve:
What do you do if you are in the process of purchasing a property and the appraisal comes back $6,000 less than the purchase price?
-- Susan

Dear Susan:
Of course it depends on what's actually written in your contract. But you probably will have four options: making a larger down payment, asking the seller to lower the price, finding another lender or withdrawing from the deal.

We'll walk through each briefly. But first, let's set the stage. Most home loans are for 80 to 95 percent of the home's purchase price and most home-purchase contracts state the deal is contingent upon the buyer obtaining satisfactory financing -- probably the case in your deal, Susan.

Let's say you contracted to buy a home for $300,000. You've established you can put down 10 percent cash, or $30,000, and need a mortgage loan for $270,000 for the remaining 90 percent. That's known by the bank as a loan-to-value ratio (LTV), and the higher the ratio, the less flexible lenders become because they have less collateral.

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Now, if the home's value is determined by the bank's appraiser to be only $294,000 (to use your $6,000 figure in this example), and the lender has consented to lend you only a maximum of 90 percent of its appraised value -- $264,600 based on the new appraisal -- you've got a $5,400 shortfall on your hands.

First, you may be asked to make up the difference by putting $5,400 more into the down payment. If the house really suits your needs, you may be able to make up that difference within a relatively short time frame -- simply through appreciation, if home values continue to rise as they have. So you still might want to take the plunge.

If you don't have the extra dough, you or your broker can approach the sellers to see if they're willing to drop the price to the appraised value. You are, after all, now armed with strong "evidence" of its "true" value in the form of that doggone bank appraisal. Depending on how many offers the sellers have had and how motivated they are to move quickly, it may work, or they may negotiate enough to keep the deal alive. After all, if one appraisal came in low, it's possible that subsequent appraisals also will fall short.

Failing that, you may be able to move the mortgage loan to a different lender who's using a more lenient appraiser. All appraisers are supposed to be steadfastly objective, of course. Still, value tabulations can vary from appraiser to appraiser. A mortgage broker, by the way, will probably be able to help you move the loan from one lender to another pretty quickly.

Finally, you can probably get out of the contract pretty easily, citing the appraisal differential and your inability to get adequate financing, and buy a more affordable home. Next time, though, you might want to protect yourself a little better by stipulating in the contract that you only want to buy a home if it appraises for the purchase price. That's certainly your right and, in fact, is a standard clause in many real estate contracts.

I hope things work out.

-- Posted: May 29, 2004

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