Orion’s brokers train their staff on common questions from borrowers. Yes, many areas in Orion’s footprint are improving in price, but there are still occasional appraisal questions or discrepancies. If an appraisal comes in below the value required, the first possible action is to establish if there are any existing comparable properties, not used by the appraiser, to appeal the value in the report. But if the appeal is denied and the value stands, what are the options available to Orion and a broker?
On a purchase transaction, borrowers have four basic options. Let’s use the following example for illustration: your client has a purchase price of $425,000 and your appraisal comes in at $400,000.
One of the primary guidelines for pricing is the loan to value (LTV). For lending purposes, the LTV is based on the lower of the purchase price or the appraised value. In the instance above, the loan to value will be based on $400,000 not $425,000. This means if the borrower was putting down 20% on $425,000, they wrote the offer to purchase the property with a loan of $340,000. When the appraisal came back with a value of $400,000 the LTV of 80% is now 85% if you keep the loan amount of $340,000.
The first option is your client agrees to pay $425,000. If they retain the loan amount of $340,000, the client will have the same down payment: $85,000. But they will now have a loan that requires mortgage insurance since it is greater than 80% LTV, adding to the monthly payment. How much depends on the type of mortgage insurance the client chooses. Or they can choose to increase the down payment by $20,000which will bring the loan amount down to $320,000 and 80% of the value of the appraisal.
The second option is that the Seller agrees to lower the price to the appraised value of $400,000, not likely as we head through April toward the summer season. The client puts 20% down on the $400,000 and the loan amount is adjusted to $320,000. The third option is where the client and the Seller meet somewhere between the appraised value of $400,000 and the original sales price of $425,000. This option may require your client to make some additional down payment to avoid mortgage insurance. And the last option is that the client walks away from the transaction. And no one wants that!