The Low Appraisal and the Lender's Condition
Nadia is pre-approved for a $480,000 mortgage at 5.25% amortized over 25 years with a five-year term. She has an accepted offer at $600,000 with a 20% down payment of $120,000. The lender's appraiser values the property at $565,000, citing a smaller lot and dated kitchen relative to recent comparables. The lender will lend only 80% of the appraised value, which is $452,000. Nadia's closing is in 18 days. She has $128,000 in liquid savings and a $15,000 line of credit. Her salesperson, Ben, suggests she ask the seller to reduce the price to $565,000, or alternatively increase her down payment to cover the gap.
1. Calculate the funding gap and evaluate Nadia's options, showing the arithmetic.
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First establish the lender's maximum loan. At 80% loan-to-value on the appraised value of $565,000: 0.80 × $565,000 = $452,000. That is $28,000 less than her pre-approved $480,000.
Now the cash needed at the accepted price of $600,000. Purchase price minus maximum loan = $600,000 − $452,000 = $148,000 required from her own funds. She has $128,000 in liquid savings, a shortfall of $20,000. Her $15,000 line of credit could cover part of it, but lenders generally will not count borrowed funds as down payment without disclosing the debt, and the added debt service reduces her qualifying capacity - so it is not a clean solution.
Option 1: renegotiate the price to $565,000. Then the loan is $452,000 and the down payment is $113,000, which she can cover from savings. This is the cleanest fix, but the seller has no obligation to reduce and may refuse or demand compensation.
Option 2: increase the down payment at $600,000. She needs $148,000; with $128,000 in savings she is $20,000 short. Even using the line of credit, qualifying becomes tighter because the lender will factor in the new debt.
Option 3: find a different lender or insurer willing to accept a higher LTV, which may mean mortgage insurance and a higher rate.
Option 4: walk away if a financing condition still protects her - but with 18 days left, the condition may already have been waived. Ben should confirm the condition status immediately, because if it was waived, the gap is Nadia's problem and failure to close exposes her deposit.
2. Ben proposed the price reduction as if it were straightforward. What should he have told Nadia about the risks and the sequencing of these options?
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Ben should have framed the appraisal as a financing event with a deadline, not a simple negotiating tactic. The first question is whether the financing condition is still alive. If it is, Nadia has leverage: she can notify the seller that financing is not available on the agreed terms and either renegotiate or terminate within the condition period. If it has been waived, she has no contractual exit and must solve the gap or face default.
On the price reduction, he should explain that a seller facing a firm deal has little incentive to reduce, and that asking for $35,000 off may prompt the seller to refuse and hold her to the contract. He should also note that a price reduction changes the deal for the seller's lender and may complicate the seller's own purchase.
On increasing the down payment, he should walk through the arithmetic: she is $20,000 short even before considering closing costs, land transfer tax, and legal fees, which he should quantify. Using a line of credit adds debt service that can reduce the loan she qualifies for.
Sequencing: confirm condition status, get the lender's written maximum in hand, calculate total cash to close including costs, then approach the seller with a documented financing problem rather than a vague request. Ben should avoid advising her to misrepresent the source of funds to the lender, which would be mortgage fraud. He should recommend she speak to a mortgage broker about alternative lenders and to a lawyer about her exposure if she cannot close.