real estate

What to do when the appraisal comes in low

Steve McLindenQuestionDear Real Estate Adviser,
I am buying a house with a purchase price of $200,000, but the bank-ordered appraisal came back at $180,000. Should I still try to purchase this property or just leave it be? Could I ask for another appraisal?
-- Vinay

AnswerDear Vinay,
For the most part, you will have to answer that question, though your lender will certainly have a voice, too.

One school of thought says the seller has simply overpriced the home and that if you pay the difference, you'll be in an upside-down mortgage the instant the deal is done. Another says that if this is your dream house and you plan to stay there a long time, then making up at least some of the difference out-of-pocket may be worth it to you. I say "some," because in this market, you should try get the owner to reduce the price closer to the appraisal sum -- perhaps meet you halfway.

If the owner balks, you may have to summon up the discipline to walk away. Assuming your contract is typical and your purchase is contingent on financing, you would have the "out" you needed to move on. There is still, after all, plenty of available, well-priced housing stock in your price range. By the way, I hope you have secured a savvy buyer's real estate agent who is counseling you on your decisions as you proceed.

It is a fact of life that appraisals are coming in conservatively at present. But don't expect the lender to order a second appraisal or honor a separate one you get. Banks use appraisers they trust and typically won't second-guess these appraisers' valuations. On the whole, it's a good thing for everyone when banks use an appraiser who doesn't inflate values just to make deals sail through. It is a fine line they walk. We all know what happened in the last real estate cycle when inflating values was a more common occurrence.

First, however, you should know about one big possible snafu you could face in paying a sum that's well higher than your bank's appraisal. If that extra payment forces you into a position where you have to buy private mortgage insurance, or PMI, because your equity would fall below the lender's required down-payment threshold, this could tack on several thousand dollars in fees and monthly payments. Make sure you have a frank discussion with your lender on this issue before you make your decision.

But in the end, if you only have to pay the difference between the purchase price and appraisal without penalty, your decision should be based on what you believe this home is worth to you. In other words, would you regret not paying the difference and then losing the home?

Good luck on your decision and your home search.

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