What does it mean when the appraisal is different than the sales price?
Posted on Wednesday, September 24th, 2008 at 8:33 am.The home's appraisal is the value the lender uses to loan against... kind of. Here's how it works:
If the value of the appraisal is higher than the price you're paying, you're in the clear. In fact, it's good. The lender will then take the sales price and loan off that. So if, for example, you have a property under contract for $600,000 with an 80% loan, and the appraisal comes back at $625,000, the lender will happily loan you $480,000, which is 80% of $600,000, because they know the value is higher than what they're loaning out.
However, if the appraisal comes back at $580,000 on your $600,000 home, you have a problem. The lender will say, "since the appraisal was lower, we're happy to loan you $464,000, which is 80% of $580,000, but we won't loan you 80% of $600,000." At this point, many things can happen that are out of the scope of this blog posting. For example, our first step would be to negotiate with the seller to lower the contract price down to the appraised value.
If the seller won't budge and you really want the house at $600,000, you could always get a 90% loan of the appraised value, which would give you a loan of $522,000. If you get a 90% loan, though, your rate will most likely be higher and you'll probably have to pay Private Mortgage Insurance (PMI) since you are no longer putting down 20%. Or, you could always just take the lower loan amount of $464,000 instead of $480,000 and bring the difference in cash.
So the point is this: If your appraisal is over the sales price, it means we did a good job of negotiating with the seller, and you're getting the property for less than the bank thinks it's worth, and you're in the clear. If the appraisal is less, we have some work to do to make sure you can still close the deal on terms that are agreeable to you and the seller.
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