Posted by: dagmarsands | August 27, 2021

Appraisal gap?

The housing market is hotter than ever and bidding wars can get competitive, meaning buyers may feel the need to offer more than the asking price and/or waiving their appraisal contingency to win the deal.

Mortgage financing guidelines always use the lower of the sales price or appraised value – so if a buyer bids over ask and waives their right to terminate if the appraisal falls short and the house doesn’t appraise for what was bid (an “appraisal gap”), the buyer is required to cover the difference between the appraised value and the offer amount in cash.

Luckily, restructuring the loan and utilizing a single mortgage insurance premium may allow the buyer to purchase the home with only a small increase to the cash-to-close, and no monthly mortgage insurance, rather than paying the full amount of the appraisal gap out-of-pocket at closing.

In Scenario 1, the buyer is bringing a 20% down payment of $100,000. Now in Scenario 2, the sales price increases $25,000 due to an escalation clause in the contract. The appraisal comes in at $500,000, causing the LTV to increase to 85% and the need for Mortgage Insurance. Scenario 3 reflects a sales price increase to $550,000 due to the escalation clause. With the same appraised value of $500,000 our new LTV is 90%. The chart above shows how we can utilize a single mortgage insurance premium to keep the buyer’s out-of-pocket cash to close to a minimum in different situations.

Scenarios are based on rates as of 07/22/2021.

Credit to this article is to Cameron Walters with Homeowners Financial Group.

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