Simply The Best Loans

One issue that continues to arise as a result of the high level of appreciation in many housing markets, is buyers’ understanding the difference between the appraised value of a property versus the sales price. In a hot market, a seller may ask and receive a higher price for his/her property but, if the buyer is getting a conventional residential home mortgage, the lender will require an independent appraisal of the property which measures value based on many aspects of the property and recent comparable sales in the area. Usually to be considered a fair comp for value, the sale must have taken place within the last 6 months.

The lender will often order a “review appraisal” which involves the submitted appraisal being double-checked by the lender’s own appraisal department. The lender can even order an additional inspection by their own appraiser if they question or have issue with some aspect of the submitted appraisal. If the lender determines the value to be less than the sales price and/or the submitted appraised value, the loan will reflect the reduced value which can impact the monies needed by the buyer to close.

For instance, a buyer contracts to purchase a home priced at $250k even though comparable sales in the neighborhood top out at $240k. The property is appraised for $250k and the loan and appraisal are submitted to the lender. The lender’s underwriter questions the value and orders an internal review. The review appraiser reviews the submitted appraisal, area comps and other appropriate market information and determines the property is over-valued by $10k. The buyer is at that point forced to either: walk away, negotiate a lower sales price or pay the $10k out-of-pocket since the loan amount will now be calculated on a lower value. If the buyer was getting 100% financing, the $10k difference would be paid by the buyer at closing in addition to closing costs.

Since most borrowers that seek 100% financing are doing so because they don’t have funds to put toward a down payment, the above scenario could create numerous problems for the buyer. One of the best ways for a buyer to protect him/herself is to work with a professional Realtor that has done a market analysis of the property and comparable sales for the neighborhood. If there is any question about value, the Realtor can ensure the contract for sale includes language which will protect the buyer and give him/her options for re-negotiating or canceling the contract should the appraisal or lender review not support the sales price.