by Dian Hymer
Most buyers get a mortgage when they buy a home, often for 80 to 95 percent of the purchase price. Therefore, most purchase contracts include a contingency for the buyers to obtain the financing they need to complete the purchase.
Precisely how the financing contingency is worded varies from one contract to the next. It could simply state that the offer is contingent on the buyers qualifying for financing, without having any reference to the property appraising for the purchase price.
When the buyers' contract is contingent on them getting a large mortgage relative to the property value, an appraisal contingency may not be necessary. If the buyers need a loan for 90 to 95 percent of the purchase price, their loan probably won't be approved for the amount they need if the property is appraised for less than the purchase price.
For example, suppose the buyers agreed to pay $200,000 for a home. They have 10 percent cash to put down, so they need to get a mortgage for 90 percent of the purchase price or $180,000. If the home appraises low for $195,000 and the lender will only grant a loan for 90 percent of the appraised value, the buyers will be approved for a $175,500 mortgage -- $4,500 less than they need to close the sale.
In this case, the buyers could choose to go through with the deal if they have an extra $4,500 to put down. Or they could ask the sellers to reduce the price to the appraised value. Otherwise, they can probably get released from the contract and have their deposit returned.
Buyers who make a large cash down payment relative to the mortgage amount won't have the same protection if they make an offer without an appraisal contingency.
Let's say you buy a $200,000 home and you have $50,000 to put down. The home appraises low at $195,000 but the lender is willing to give you a loan for 80 percent of the appraised value -- $156,000 in this example. Since you only need a $150,000 mortgage, your loan will probably be approved.
First Time Tip: Is it a big mistake to pay more for a property than the appraised value? Not necessarily. Appraisals are somewhat subjective. Two appraisals of the same property, done at the same time, won't necessarily come in at the same value. There's usually a range of acceptable market value for a property.
Also, property values are in a constant state of flux. It's more difficult to pin point a value when the market is changing. When values are rising, yesterday's sales may be out of date in terms of what buyers are paying today for similar properties. When values are falling, comparable sales from a few months ago may be higher than current market value.
When values are rising, paying a little more than the appraised value isn't a major issue for most buyers. Appreciation will probably make up the difference shortly. Buyers are usually more sensitive to over-paying, even by a small amount, when values are stable or declining.
Paying a little more than the appraised value when you find exactly the property you want isn't a sin, particularly if you've looked for awhile with no luck, and you're sure you won't have to move again soon. It's not always easy to find a home that suits your particular needs.
The Closing: But if you only want to buy a home if it appraises for the purchase price, your best protection is to specify this as a contingency in the purchase contract.
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