The appraised value should be at least as high as the asking price for the best result of an appraisal. A low appraisal compared to the asking price or the proposed purchase price can cause issues with closing a sale because the bank bases the buyers mortgage financing on the appraised value.
Financing Hinges on Appraised Value
The appraised value is crucial from the perspective of lenders when making a mortgage loan. The appraisal is a unbiased, qualified assessment of the value of the home in the current local real estate market. The lending limit percentage of the loan product multiplied by the appraised value will yield the maximum loan amount. The maximum loan amount, for instance, will be 95 percent of the appraised value or the selling price, whichever is lower, if the buyers want a loan that will cover up to 95 percent of the purchase price.
Asking vs. Selling Prices
The initial amount the buyer lists the house for sale will be the asking price. In many cases, the asking price will not match the final sale price, which could be higher or lower. When the buyer and seller decide on a sales price for the house, the appraised value becomes a problem. However, the seller has a good starting point for determining the asking price if she is aware of the home’s appraisal value in advance. For instance, the asking price might be set higher than the appraised value, allowing for a lower selling price to be reached through negotiation.
Appraisal Below Agreed Sales Price
If the appraised value is less than the agreed-upon sales price, there is a financing issue. For instance, a buyer agrees to pay $700,000 for a home, but the appraisal only shows that it is worth $675,000 The most the buyer can borrow is $641,250 if the loan covers 95% of the appraised value. Instead of the $35,000 down payment required if the home had appraised for the $700,000 asking price, the buyer needs a down payment of $58,750 to complete the transaction.
Working Around a Low Appraisal
The buyer will ultimately be required to make a larger down payment than anticipated if the appraisal value is low compared to the selling or asking price. Naturally, it’s possible that the buyer won’t be able to raise the down payment by thousands or tens of thousands of dollars. The seller might be compelled to reduce the asking price to a figure that is more in line with the value determined by the appraisal. Due to the lender’s loan-to-value limits being met, buyers would be able to purchase the home with down payments and financing.
Since 2007, Tim Plaehn has been publishing articles and blogs on finance, investments, and trading. His work has appeared online at Seeking Alpha, Marketwatch. com and various other websites. Plaehn has a bachelors degree in mathematics from the U. S. Air Force Academy.
FAQ
Does house need to appraise for purchase price or loan amount?
The lender must conduct a home appraisal as part of the underwriting process for nearly all mortgage applications. The lender prefers to have an appraised value that is equal to or higher than the price that the buyer and seller have agreed upon, but occasionally the appraisal comes in lower.
Does appraisal need to meet sales price or loan amount?
No, but a home should appraise for the loan amount instead of the selling price. According to the loan-to-value ratio, the financed price is the most money a lender will give. For instance, a 20% down payment would be necessary if the LTV was 80%.
Do appraisals usually match asking price?
The appraisal will frequently be less than the selling price because it only considers previously sold homes and ignores future prices. It would be comparable to setting the price of a tank of gas based on your previous purchase rather than the state of the market at the time.
Does appraisal need to be higher than loan amount?
Although it is always great when the property appraisal exceeds the price you agreed to pay for it, this in no way affects the loan amount you must qualify for or the down payment you must make in order to close on the mortgage loan. Both conventional and unconventional mortgage products offer similar requirements.