Updated: Apr 21, 2020
Credit: Alain Pham
Our colleague, Kim Wrobel from Loan Depot, will unravel the rather complex issue of waiving an appraisal contingency. Many buyers are doing this in a desperate effort to buy their homes, but is it the smartest way to approach your offer? Find out if this type of waiver is right for you. Many borrowers ask about waving appraisal contingencies in today’s competitive market. Should you do it? Waiving the appraisal contingency makes the offer more favorable for the seller in the event the property appraises for less than the sales price. The FNMA/FHLMC guidelines mandate that the loan to value (LTV) be determined based on the LOWER of the appraisal or sales price. What this basically means to buyers is this: If the appraisal comes in lower than the purchase price, they will have to come up with additional dollars to keep the transaction at the purchase price agreed upon.
Also, they will not be able to go back to the seller and state, “The appraisal came in low and I want to renegotiate the price." While it is rare that appraisals come in less than the sales price, it is good to know how the numbers will work out:
Let’s assume a single family home is listed at $625,000 and the borrower makes an offer at $660,000 (approximately 5.3% higher than the list price). The borrower plans to put down 20% or $132,000 and the loan amount is $528,000 (80% of the proposed purchase price of $660K). Let’s assume the property appraises for $650K. The lender will now use the LOWER of the appraisal or purchase price to establish the loan to value (the purchase price on the P&S remains at $660,000 as agreed to by waiving the contingency). The lender will now lend 80% of the $650,000 appraisal or a mortgage of $520,0000.
Now let’s look at the dollars the borrower will need in order to keep the purchase price at $660,000 with a lower loan amount:
Purchase Price $660,0000
Less Mortgage Amount ($520,000) (calculated based on the appraisal x 80%)
Down payment necessary $140,000
If the home appraised at the agreed purchase price, the borrower would need $132,000 for the down payment. The low appraisal increases the down payment in this example by $8,000 (this is also reflected by the change in loan amounts; from an original loan amount of $528,000 to a reduced loan amount of $520,000).
Waiving the appraisal contingency can certainly put an offer in a more favorable light (than one with an appraisal contingency), as the seller has assurance that the price agreed on will stand and not be renegotiated after appraisal.
It is rare that appraisals come in below sales price in this market but it is good to be educated and prepared if it does.