How Much Above Appraisal Will Banks Loan For A Mortgage?

When you make an offer on a home, there is always a risk that the appraised value will come in lower than the purchase price In that case, how much will lenders be willing to loan above the appraisal value? There are limits, but some flexibility exists depending on the type of loan

Why Appraisals Matter For Mortgage Lenders

Lenders rely on appraisals to ensure they are not lending more than a property is worth. The appraised value represents the current fair market value of the home based on recent sales of comparable properties.

Lenders want to avoid a situation where the borrower defaults and the home sells at foreclosure for less than what is owed. So appraisals give lenders a level of protection against losing money.

The general rule is lenders will not loan more than the appraised value of a home. But most are willing to go slightly above it under certain circumstances.

FHA Loans Allow Up To 96.5% LTV Above Appraisal

FHA loans are popular for buyers making a smaller down payment. With an FHA loan, you can put down as little as 3.5% of the purchase price.

If the appraisal comes in below purchase price, FHA guidelines allow lending based on 96.5% of the appraised value. For example:

• Purchase Price: $200,000
• Appraised Value: $180,000
• Down Payment: $7,000 (3.5% of purchase price)
• Max FHA Loan Amount: 96.5% of $180,000 = $173,700

So with an FHA loan, the lender could loan up to $173,700 based on the lower appraisal, and you’d need to cover the remaining $19,300 difference.

Conventional Loans Allow Up To 97% LTV Above Appraisal

Conventional loans with less than 20% down also provide some flexibility if the appraisal is low. These loans allow lending up to 97% of the appraised value.

For example:

• Purchase Price: $200,000
• Appraised Value: $180,000
• Down Payment: $10,000 (5% of purchase price)
• Max Conventional Loan Amount: 97% of $180,000 = $174,600

So on a conventional loan with 5% down, the lender could loan up to $174,600 based on the appraised value, and you’d need to cover the $15,400 difference.

Jumbo Loans Typically Limited To Appraised Value

Jumbo mortgages above conforming loan limits generally adhere strictly to the appraised value when determining the max loan amount.

With a jumbo loan, if you are purchasing a high-priced property, be prepared to make up any gap between appraisal and purchase price with a larger down payment.

However, sometimes lenders will allow 101% to 103% of appraisal on a jumbo loan if you have excellent credit, a low debt-to-income ratio, and substantial assets. But you’ll need a large down payment, often 40% or more of the purchase price.

VA and USDA Loans Can Exceed Appraisal Under Some Conditions

VA loans and USDA loans will sometimes allow lending beyond the appraised value if certain requirements are met:

VA Loans

• Up to 100% of purchase price if buyer is service-disabled veteran
• Up to 100% of appraised value plus closing costs if buyer makes 25% down payment

USDA Loans

• Up to 100% of purchase price if property meets USDA quality standards
• Up to 100% of appraised value plus closing costs if buyer requests

So VA and USDA loans offer more flexibility than conventional loans when the appraisal is low.

What If Appraisal Is Higher Than Purchase Price?

It’s always a nice surprise when the appraisal exceeds the negotiated price you agreed to pay. In this case, lenders will simply base the loan amount on the lower purchase price, not the higher appraisal.

The mortgage amount does not change just because the appraisal came in high. The lender will lend based on the actual sales price.

Negotiating With Seller If Appraisal Is Low

If the appraisal means you can’t borrow the full amount originally needed, you’ll have to make up the difference to complete the purchase. Here are some options to cover an appraisal gap:

• Ask seller to lower price – Most successful if little buyer competition.
• Increase down payment – May require dipping into savings beyond what you planned.
• Request seller to cover gap – Typically seller will ask for higher price in return.
• Dispute appraisal – Must provide evidence of errors driving low value.

If negotiations with the seller fail, you can also walk away and get your earnest money deposit back if you included an appraisal contingency.

Lenders Have More Flexibility For Prequalified Borrowers

One advantage of getting prequalified early when making an offer is that lenders will often bend more if the appraisal is slightly low. They have more confidence you’ll close the loan successfully.

If you made an offer without lender preapproval, the bank will be more rigid about sticking to the appraised value. Prequalification provides more leeway in bridging an appraisal gap.

Check With Your Lender on Appraisal Policies

Ultimately, each lender establishes their own policies on lending above appraised value. The percentages and scenarios described here are general guidelines, but maximums can vary.

To understand exactly how much your lender will be willing to finance over the appraisal, discuss scenarios with your loan officer before making an offer. This allows you to craft the strongest offer knowing how appraisals will be handled.

Being armed with the right information helps when deciding how far above asking price you can reasonably offer when bidding for a home. Know your lender’s policies on appraisals before you start shopping in a competitive market.