To answer some of these concerns, we are going to highlight a few of the real life options that are out there other than “you have to make up an appraisal shortfall by paying the difference.”
If you have more than 20% down, and want to know how that can impact the appraisal, read SCENARIO 1 about Dan and Sue.
If you have 20% down, and want to learn how you can leverage your down payment to bypass the need for an appraisal entirely, read SCENARIO 2 about Tom.
If you have less than 20% down, and want to learn how we use up-front MI when the appraisal comes in short because you're unable to make up the difference, read SCENARIO 3 about Eric and Leslie.
SCENARIO 1
Dan and Jane were looking to buy their first home in CA in the $1m to $1.1m range. The conforming high balance loan limit the Los Angeles county in 2021 is $822,375. When they spoke with us, one of the things they learned is that that “jumbo” loans (loans over $822,375 in those counties) sometimes have higher rates, are harder to qualify for, and close slower (making them less appealing to sellers and listing agents in this hot market), compared to conforming high balance loans, so Dan and Jane decided to put enough down to get the loan amount to $822,375 or less. Instead of 20% down, they put down just enough to get the loan amount exactly at that limit. Click here for current California county limits. We referred Dane and Jane to one of our local Realtors, so their Realtor already knew “the deal,” so we went over what this means for them.This means that at some price points, they have automatic appraisal gap coverage. They were thinking of offering to buy a home for $1,075,000, after having their Realtor run a comparable market analysis (CMA) with them to show them what the home is likely to sell for. $1,075,000 – $822,375 = $252,625. That was their intended down payment, it works out to about 23.5% down. Further, they were worried the appraisal might come in a little short. In fact, the appraisal could come in as low as $1,027,000, and it wouldn’t have any impact on their financing. That’s because 80% of $1,027,000 is <$822,375, and that’s all they want to borrow anyways. When Dan and Jane put their offer in, there’s no risk that including a provision that they will “cover” an appraisal gap down to $1,027,000 will impact their cash to close, their interest rate, their fees, or anything else. After being preapproved to start the house hunt, Dan and Jane checked in with us to customize their $1,075,000 offer thusly, and they beat out a few dozen other offers, including one that was later disclosed to me to be for $1,100,000 ($25,000 higher!) that did not have such a provision attached to it. In the end the property appraised for exactly their offer price (this is almost always the case), and they’ve since closed on their purchase, but the zero-risk appraisal gap coverage is what got their offer accepted in the first place. Click here to get preapproved, so you can take advantage of this sort of insight when working with your Realtor to craft your offer, and click here if you’re a Realtor who isn’t getting this sort of strategic support but think it could help your clients out.
SCENARIO 2
Now let's look at Tom's successful home purchase. This one is fairly straightforward, and Sacramento price points and scenarios have become normal to us since the start of the Pandemic, due to Bay Area folks fleeing to Sacramento. He had his eyes on a single family home in a subdivision with lots of other similar single family homes; he’d already had his offers rejected by 4 previous sellers, he wanted this house and to be done with it. After reviewing a CMA with their Realtor, it was determined that the home would likely sell for around $560,000 even though it was listed for $490,000 (“listing low” is a common strategy in California). Tom had a strong down payment, good credit, a good job, and wasn’t looking at a unique property, so he was a good candidate for a possible appraisal waiver. An appraisal waiver is when the automated underwriting system (AUS) determines that there’s sufficient data in existing appraisals already on record to support the contract price, meaning no appraisal is required. Tom, good planner that he is, let us know two days ahead of time that he would be putting in an offer for something in the mid-500s on that property. We ran the AUS at $570,000 and determined that an appraisal would be needed. We ran it again at $525,000, and got the appraisal waived. We played a little bit of whack-a-mole and established that $540,000 was Tom’s max purchase price without requiring an appraisal. Tom’s Realtor called the listing agent, and gave them a choice: “Would your seller client like an offer for $540,000 with no appraisal required, or would your seller client like a $560,000 offer with an appraisal that could very well come in low, perhaps even lower than $540,000?” In the end, Tom’s offer was accepted at $540,000, which is $20,000 less than he was actually willing to pay, and below the CMA! When no appraisal is required, closing can happen remarkably fast. If you’re curious what artificial intelligence has to say about a specific market, you are more than welcome to play with one of our AI tools for free.
SCENARIO 3
Finally, let’s go over Eric and Leslie's first home purchase. In their case, the appraisal did come in under asking price. The home they purchased had an amazing back yard and the appraiser was unable to find market data from closed comparable sales justifying the contract price of $725,000. No such data existed, since no other homes in the area had yards that big! They were planning on putting 15% down on this purchase, which would have been $108,000, financing the remaining. Unfortunately, the appraisal came in at $700,000, and they didn’t have an extra $25,000 just sitting around! We gave them a few options to consider using mortgage insurance as appraisal gap coverage. Whenever you put less than 20% down, you'll have mortgage insurance. So, one option was paying one-time mortgage insurance, rather than paying it monthly. The loan amount and interest rate would have remained the same, the monthly payment would have been reduced by $57 per month, and the insurance policy would have been a one-time cost added to closing (note that $6,885 MI fee is a lot smaller than $25,000). This wasn’t a particularly appealing option, so we explored others that are similar to the one presented. The option that Eric and Leslie ended up going with was to restructure the loan to 10% down. Now at 90% LTV loan, the monthly mortgage insurance went up from $57 per month to $100 per month which covered the appraisal gap and got to keep $13,750 in their pocket, this isn’t overall that terrible of an option. We can never guarantee appraisal results, but we’ve got all sorts of solutions that you probably didn’t know existed. Let’s touch base and talk about how to hedge your bets. If you want to go over the basics of PMI from a high level, reach out we can go over it in detail with you.
We went over 3 different real life scenarios. The first scenario was Dan and Jane who were already putting down more than 20%, which comes with implicit built-in appraisal gap coverage up to a certain amount, and they were able to use that to increase their offer. The second scenario was one where not needing an appraisal at all is what got Tom the accepted bid and for $20,000 less than he would have been willing to pay. And lastly, Eric and Leslie's home situation where they used one-time upfront mortgage insurance as both appraisal cap coverage and to reduce their down payment.
We went over 3 different real life scenarios. The first scenario was Dan and Jane who were already putting down more than 20%, which comes with implicit built-in appraisal gap coverage up to a certain amount, and they were able to use that to increase their offer. The second scenario was one where not needing an appraisal at all is what got Tom the accepted bid and for $20,000 less than he would have been willing to pay. And lastly, Eric and Leslie's home situation where they used one-time upfront mortgage insurance as both appraisal cap coverage and to reduce their down payment.
You’ve got questions? We have answers: Click here to set up a time to chat, or click here to start your mortgage preapproval application.
Aundrea Beach-Greco
Mortgage Lender, CMPS
NMLS 333739
š± +1 702-326-7866
š§ info@aundreabeach.com
š www.AundreaBeach.com
.
.
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Aundrea Beach-Greco, CMPS. Licensed Mortgage Loan Officer. NMLS 333739
702-326-7866 info@AundreaBeach.com
Find me online www. AundreaBeach.com
Apply online at www.iLendLasVegas.com
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