The $950,000 Appraisal and a Misunderstood Seller Credit
Your buyer is in contract at $1,000,000 with 20% down on a conventional 30-year loan at 6.75%. Preapproval was for $800,000. The appraisal comes in at $950,000 and the seller refuses to reduce the price. The buyer has $200,000 in liquid funds; estimated closing costs and prepaids are $18,000. The buyer's agent proposes asking the seller for a $28,000 credit toward the buyer's costs. The buyer responds: 'Perfect, I'll use the extra $10,000 to cover my down payment shortfall.' The lender's underwriter has already flagged the file, and the seller wants to close in 30 days.
1. Compute the actual cash gap and determine whether a $28,000 seller credit closes it.
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Work the numbers from the appraisal, not the contract price, because the lender will.
- Loan: 80% of $950,000 = $760,000
- Down payment: $950,000 - $760,000 = $190,000
- Closing costs and prepaids: $18,000
- Total cash needed: $208,000
- Cash available: $200,000
- Shortfall: $8,000
The buyer cannot borrow the difference; the appraisal caps the loan at $760,000 unless they bring more cash or restructure.
The credit. A seller concession is capped by loan guidelines - on a conventional primary residence at 80% LTV, the cap is 3% of the sales price, here 3% of $950,000 = $28,500, so $28,000 is under the cap. But a concession can only offset actual closing costs, prepaids, and similar allowable charges; it cannot exceed them and cannot be applied to the down payment. The usable credit is therefore $18,000, which zeroes out closing costs. The buyer then needs only $190,000 of their $200,000, leaving a $10,000 cushion. The deal closes - but not because of the extra $10,000 the buyer thinks they are getting.
2. What do you tell the buyer about the 'extra $10,000,' and what alternatives exist if the credit falls apart?
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Tell the buyer plainly that the unused $10,000 does not exist. It is not a rebate, it cannot be applied to the down payment, and it will not be paid to them at closing; the credit is capped at the actual costs it offsets. If the seller agrees to $28,000 and only $18,000 of costs exist, the excess simply evaporates. Buyers who believe otherwise often make irreversible plans - ordering furniture, waiving their own cash reserve - before the closing disclosure reveals the truth. Put the correct figure in writing now, and explain the closing disclosure will show it.
If the credit is refused or reduced, the workable options are:
- Reduce the price to $950,000 so the appraisal and contract match, which lowers both the loan and the down payment.
- Restructure the loan - for example a lower down payment with mortgage insurance, or a second lien - accepting a higher payment and rate.
- Bring in documented gift funds, if the loan program allows.
- Reduce closing costs by negotiating fees or choosing a lower-cost lender.
Advise against the buyer waiving the appraisal contingency on the next property. Confirm in writing that the buyer understands the $8,000 gap was real and has been solved by the credit, not by wishful accounting.