Low Appraisal, a Seller Second, and a Gift That Needs Sourcing
The Nguyens are under contract at $365,000 with 5% down on a 30-year conventional loan and a 24-day close. Their savings are about $13,000; a $15,000 gift from My-Le's sister was deposited into their checking account 11 days ago, and the loan officer has the file otherwise approvable. The appraisal came back at $342,000, citing a smaller lot and dated baths. The contract's appraisal contingency lets the buyers terminate within five business days of receipt, which is Thursday; the financing contingency runs until three days before closing. The listing agent says the seller will not reduce the price but will 'carry back a $23,000 second mortgage at 9% for two years' to bridge the gap. Closing costs are about $9,000. The buyers like the house and ask, 'Can we just take the seller's second and keep the price?'
1. Work the numbers, then list the buyers' realistic options and how you would rank them before Thursday.
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The math. Lenders use the lesser of price or appraised value: 95% of $342,000 is a $324,900 first mortgage. At a $365,000 price, the buyers need $40,100 down plus about $9,000 in closing costs, roughly $49,100. They have about $28,000. So they are short roughly $21,000 - which is why the $23,000 second looks attractive.
Why it is not a clean fix.
- The first lender must approve the subordinate financing. Combined loan-to-value would be $347,900 against a $342,000 value, about 101.7%, above the 95% ceiling many conventional programs allow. The structure may simply be ineligible.
- The second's payment counts in debt-to-income: interest-only at 9% is about $172 a month, fully amortizing closer to $1,050, and both are worse than the loan they were approved on.
- It is a two-year balloon. They must refinance into a market and a value they do not control, and if values drop they may not be able to.
- The appraisal problem does not disappear. They would be paying $365,000 for a house the market says is worth $342,000, with negative equity at closing.
Options, ranked:
- Renegotiate the price toward $345,000 to $350,000. The appraisal is leverage and this is the cleanest outcome.
- Ask for repairs or a credit to shrink the gap without changing the price.
- Submit a reconsideration of value through the lender, with genuine comparable sales, not pressure on the appraiser.
- Bring more documented cash - but only real, sourced funds, not a borrowed gift.
- Terminate within the appraisal contingency and recover earnest money.
Advise a written decision before Thursday; the contingency does not protect them after it passes.
2. The gift and the deadlines: what must the buyers produce, and which dates actually control?
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The gift. The lender will want a signed gift letter stating the funds are a gift with no repayment expected, the donor's bank statement showing the money existed, evidence of the transfer into the buyers' account, and a paper trail if funds moved between accounts. Eleven days of seasoning is normally fine when documented. What is not fine is a 'gift' that is really a loan: if the sister expects repayment, it must be disclosed as a debt, and disguising it is mortgage fraud that follows the buyers long after closing.
The dates.
- Thursday: the appraisal contingency. Extension or termination must be in writing and delivered per the contract; letting it lapse silently is a decision to proceed at $365,000.
- Three days before closing: the financing contingency. If the loan is not cleared, they need a written extension.
- Closing Disclosure: must be received at least three business days before consummation. A restructured deal - seller second, changed down payment, new closing date - changes the terms and can restart that clock.
- Rate lock: an expiring lock plus a restructure means extension fees or a higher rate, which changes the affordability math again.
Practical sequence: get the lender's written position on the second before Thursday rather than after, because if the CLTV kills the structure, the negotiation with the seller looks different. Ask the loan officer for a revised Loan Estimate and a revised closing timeline the same day.
3. What are your duties as their agent when they ask whether the seller's second is a good idea?
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Educate, don't decide. You are not their lender, lawyer, or tax adviser, and you should say so. What you can do is lay out the consequences in writing: a two-year balloon, a higher combined payment, negative equity at closing, and the refinance risk if values fall or their income changes.
Resist the deal-saving instinct. The pressure to keep the transaction alive is exactly when buyers get talked into structures they do not understand. 'It's only two years' is not your sentence to say.
Coordinate, don't freelance. Confirm with the loan officer in writing whether a subordinate lien is permitted, what the combined LTV cap is, and what documentation the underwriter needs. Get the sellers' second reviewed by an attorney - a private note with a balloon, a default clause, and a possible due-on-sale provision is a legal document, not a handshake.
Protect the file. Put your analysis in a dated email, ask the buyers to confirm their decision in writing, and note that you recommended legal review. Do not help draft a gift letter that misstates the terms, do not suggest they 'park' funds, and do not advise waiving the appraisal contingency to solve a timing problem.
If they choose to proceed, the checklist is: written lender approval of the second, revised disclosures with enough lead time before closing, an updated Closing Disclosure, and a clear plan for the balloon date. If they choose to terminate, get the written notice delivered before Thursday and confirm earnest money release in writing.