In this market of foreclosures and home prices dropping by the minute (not exactly but it can sure seem that way), there are times when the appraised value and the purchase price are not the same. For starters, if the appraised value is lower than what you are going to pay, you may want to rethink your offer. There are also instances when you are purchasing the house for $225K and it is worth $250K (or so the appraiser says).
Quick Tip - A house is only worth what someone is willing to pay for it. So even if the house has an appraised value of more than what you are offering, you must think that it may only be worth what you were willing to pay, because there may not be someone else who thinks it is worth more.
In the example above you believe that you have built in equity, which may be the case, but the lender will not base your Loan To Value (LTV) on the appraised value, he will base it on your Purchase Price. Here is what that means for you...
- You must consider that the purchase price is your starting point. A loan for $225K on a purchase price of $225K is...that's right 100% LTV.
- The loans that give you the best rates , if the borrower qualifies, are those at 80% LTV. You would need to put down at least $45K + closing costs to get this loan. Your loan amount would be $180K.
- Any loans over 80% LTV require PMI (Private Mortgage Insurance), or you can choose to get a 2nd loan to cover the difference. (Purchase Money 2nd's are very difficult to obtain in today's market so PMI may be the way to go.)
- 100% LTV loans are difficult to obtain and come with a higher interest rate. In this market the likelihood of a buyer needing to bring money in to complete any deal is pretty high.
There are alternatives...FHA Loans are great and allow a buyer to bring in a minimum of 3% (in the example above that would mean as little as $6,750 to the table), some lenders still have "My Community" mortgages but the underwriting is difficult because of declining home values (this may work if you have an appraisal higher than the purchase price).
Overall, it is good to remember that whatever your Purchase Price is, that is where the value starts.
FYI -Refinances are based on the appraised value. Tomorrow, I will get into underwriting and appraisals and how they relate to the loans.
Make it a great day.