The Appraisal Came in Low and the Seller Promised $6,000
A buyer contracts at $285,000 with 10 percent down and a financing contingency written as "a conventional loan of 90 percent of the purchase price." Closing costs are estimated at 2.5 percent of the loan amount. The appraisal comes in at $278,000. The contract has no appraisal contingency. The seller agreed to pay $6,000 of the buyer's closing costs; the lender limits seller concessions to 3 percent of the sales price on this loan program. Annual property taxes are $2,340, paid in arrears, and the contract prorates taxes to the day of closing with the day of closing charged to the buyer. Closing is October 15. The seller's existing mortgage payoff is $142,300 and the brokerage fee is 6 percent of the sales price.
1. How is the loan amount determined, and what happens to the buyer's cash requirement?
Read the worked answer
Loan sizing rule. The lender lends against the lesser of the sales price or the appraised value.
| Item | Amount |
|---|---|
| Contract price | $285,000 |
| Appraised value | $278,000 (controls) |
| 90% of appraised value = maximum loan | $250,200 |
| Down payment the buyer must bring (price − loan) | $34,800 |
| Down payment the buyer expected (10% of $285,000) | $28,500 |
| Additional cash needed | $6,300 |
Is the buyer protected? Read the contingency literally. It promises a loan of 90 percent of the purchase price, which would be $256,500. The lender will not fund that amount, so on a strict reading the contingency's condition has not been satisfied and the buyer may have a termination right. But the more common and more defensible reading - and what most Alabama contract forms contemplate - is that the buyer is protected against being denied financing, not against a value that is lower than expected. A buyer who is approved at 90 percent of appraised value but dislikes the number may not have an automatic exit.
The real options:
- Renegotiate the price to $278,000 (or somewhere between) so the loan-to-price ratio works.
- Bring the extra $6,300 in cash.
- Terminate, but only if the contingency language genuinely supports it - counsel should review.
Also note: at 90 percent LTV the buyer will pay for mortgage insurance; if the price is renegotiated to $278,000 the LTV stays at 90 percent, so PMI does not go away.
2. Does the $6,000 seller concession survive the lender's limits, and how should it be structured?
Read the worked answer
Test the cap. The program allows interested-party contributions of 3 percent of the sales price: 3% × $285,000 = $8,550. The $6,000 promised is under the cap, so it is permissible as written.
Two conditions that are easy to miss:
- Actual-cost limitation. Seller concessions cannot exceed the buyer's actual closing costs and prepaid items. The buyer's estimated closing costs are 2.5% × $250,200 = $6,255, before prepaids and escrow deposits, so $6,000 fits - but if the loan shrinks further or fees come in lower, the allowance gets trimmed to the real costs.
- Structural risk. Because the appraisal is $7,000 below the price, a $6,000 concession on top of an above-market price is exactly the pattern underwriters scrutinize as an inflated-price/inducement structure. Expect the lender to re-examine whether the price is supported and possibly to reduce the concession if value is restated.
Drafting point. The concession should be stated in the contract as a credit toward the buyer's closing costs and prepaids, subject to lender approval, not as a price reduction and not as cash to the buyer. Cash back to the buyer is prohibited. If the buyer terminates or the concession exceeds actual costs, the unused portion stays with the seller.
Bottom line: $6,000 is within the 3 percent cap and can be honored, provided actual buyer costs absorb it and the lender accepts the value.
3. Compute the seller's net proceeds at closing, and identify the item most likely to change.
Read the worked answer
Proration first. Taxes are $2,340 per year, paid in arrears, so the seller owes for the period of ownership. Using actual days, January 1 through October 15 inclusive is 288 days:
$2,340 ÷ 365 = $6.41096 per day × 288 = $1,846.36 charge to seller, credit to buyer. (On a 360-day/30-day-month convention the figure would be $2,340 ÷ 360 × 285 = $1,852.50 - close, but the contract controls which method applies, so read it.)
Seller's statement:
| Line | Amount |
|---|---|
| Contract price | $285,000.00 |
| Less seller concession to buyer's costs | −$6,000.00 |
| Less brokerage fee (6% × $285,000) | −$17,100.00 |
| Less payoff of existing mortgage | −$142,300.00 |
| Less property tax proration (debit seller) | −$1,846.36 |
| Estimated net to seller | $117,753.64 |
Most likely to change:
- The concession - if the buyer's actual closing costs come in below $6,000, the seller keeps the difference rather than paying it out.
- The payoff - a per-diem interest charge to the payoff date will be added by the existing lender.
- The proration method - 365-day versus 360-day changes the number by about $6.
- Price - if the parties renegotiate to the appraised value, everything downstream shifts.
The seller's agent should deliver this net sheet in writing before the contract is signed, not at the closing table, and label every figure an estimate.