We’re currently experiencing the hottest seller’s market that I’ve witnessed in my 22 years in the mortgage industry. Virtually every listing is receiving multiple offers, and usually the buyer needs to waive their appraisal contingency to have a chance of having their offer accepted. From the seller’s point of view it makes sense, why would they want to accept a certain price for their house only to have it renegotiated if the appraisal comes in below the purchase price?

Understandably this can cause anxiety for buyers concerned they may have to contribute more funds than they’re able to or comfortable with. Having a strategy and understanding the math helps our clients make an informed decision. Let’s go over a common misconception, and an example of when additional funds aren’t necessary.

Example #1: When Additional Funds Are Needed, $1M Purchase, 5% Down Payment

• $1,000,000 Purchase Price | $950,000 Loan Amount = $50,000 Down Payment
• House Appraises for $950,000 | Misconception is buyer covers the full $50,000 gap
• Math: Maximum Mortgage Amount is 95% of the lesser of appraised value or purchase price
• $950,000 x95% = $902,500 New Loan Amount | New Required Down Payment: 97,500

Example #2: When Additional Funds Are Not Needed, $1M Purchase, 10% Down Payment

• $1,000,000 Purchase Price | $900,000 Loan Amount = $100,000 Down Payment
• House Appraises for $950,000
• Math: Maximum Mortgage Amount is 95% of the lesser of appraised value or purchase price
• $900,000 Loan Amount / $950,000 Appraisal = 94.74% Loan-to-Value
• Down Payment Remains at $100,000

The scenario’s above are based on a conventional loan. While the math is fundamentally the same, it can vary based on loan programs and guidelines, and have an impact on terms such as interest rate and mortgage insurance premiums. Educating our clients on potential appraisal outcomes is an important topic. If you’d like to schedule a free consultation, feel free to call us at (949) 238-6035, or start online at: www.mattcadymortgageteam.com