Appraisal Gap on a 1905 Three-Decker
Buyer has a signed contract to purchase a 1905 three-decker for $410,000. She is preapproved for a 30-year fixed loan at 80% loan-to-value and has $86,000 liquid; she expects $8,000 in closing costs. The lender's appraisal comes in at $382,000. The contract has a mortgage contingency but no appraisal contingency, and the seller refuses to reduce the price. The loan officer says the file is 'subject to appraisal' and suggests the buyer 'just get a new appraisal from a friendlier lender.' The buyer asks whether she can still close and what to do.
1. Calculate the loan amount and cash needed at 80% LTV, and determine whether the buyer can close as planned.
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The lender uses the lesser of the $410,000 price and the $382,000 appraisal. At 80% LTV, the loan is 0.80 × $382,000 = $305,600. The buyer's required down payment is $410,000 − $305,600 = $104,400. Adding $8,000 closing costs gives $112,400 cash needed.
The buyer has $86,000. If the $8,000 closing costs are paid from that, only $78,000 remains for the down payment-$26,400 short. She cannot close as planned without more cash or a changed structure.
2. What options does the buyer have, and what are the risks of each?
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Options: (1) renegotiate the price to $382,000 or lower; (2) bring an extra $26,400 from savings, a gift, or a loan, subject to lender rules; (3) accept a higher LTV-for example, 90% of $382,000 is $343,800, leaving a $66,200 down payment plus $8,000 closing = $74,200, which fits her cash but adds mortgage insurance and a larger payment, if approved; (4) use a second mortgage or down-payment assistance if eligible; or (5) cancel under the financing contingency if the loan is not approved and she gives timely notice. She should not waive the financing contingency without understanding the deposit risk.
3. How should the agent respond to the loan officer's suggestion about a 'friendlier' appraisal?
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The agent should not participate in shopping for a 'friendlier' appraisal or suggest an appraiser who will hit the price. That can be mortgage fraud and violates the licensee's duty of honesty. The proper route is the lender's reconsideration or appeal process: submit recent comparable sales, corrections to the appraisal, and documentation of condition.
Switching lenders may be legitimate for better terms, but not for the purpose of influencing value. The agent should document the advice and let the lender and attorney handle the appraisal dispute.