The Appraisal That Missed by $16,000
Purchase price is $312,000. The buyer is pre-approved for a 30-year conventional loan at 90% LTV, 6.5% interest. The contract has a financing contingency and a $5,000 earnest money deposit, but no appraisal contingency. The buyer has $46,000 in verified liquid funds. Estimated loan-related closing costs are $7,800 and the lender requires two months of reserves at $2,400 PITI per month. The appraisal comes in at $296,000. The seller refuses to reduce the price but says the seller "might help with closing costs." Conventional seller concessions are capped at 6% of price at this LTV.
1. Compute what the lender will actually lend and the buyer's resulting cash shortfall.
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The lender lends against the lesser of price or appraised value, here $296,000.
| Before appraisal | After appraisal | |
|---|---|---|
| Basis for LTV | $312,000 price | $296,000 appraised value |
| Maximum loan (90%) | $280,800 | $266,400 |
| Required down payment | $31,200 | $45,600 |
| Closing costs | $7,800 | $7,800 |
| Cash to close | $39,000 | $53,400 |
| Required reserves | $4,800 | $4,800 |
| Total funds needed | $43,800 | $58,200 |
Shortfall: $58,200 − $46,000 = $12,200. Of that, $7,400 is needed just to get to the closing table ($53,400 − $46,000) and $4,800 more is needed to satisfy the reserve requirement, which the lender verifies as funds remaining after closing. Before the appraisal the plan worked with $2,200 to spare; the appraisal wiped out the entire cushion and $10,000 more.
2. Rank the possible fixes with numbers. Which do you recommend?
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Key structural point: because the loan is capped by appraised value, every dollar of price reduction is a dollar less cash the buyer must produce, and seller credits can only offset closing costs, never the down payment.
- Price reduction to $296,000. Loan $266,400; down $29,600; cash to close $37,400; with reserves $42,200 ≤ $46,000. Works cleanly. Seller refuses.
- Price reduction to $299,000. Loan still $266,400 (capped); down $32,600; cash to close $40,400; with reserves $45,200 ≤ $46,000. Works with $800 to spare. This is the smallest price cut that solves the problem and the number to put on the table.
- Seller credit of $7,800 toward closing costs. Cash to close drops to $45,600 - but that leaves only $400 for reserves, $4,400 short. Credit alone fails; it only works combined with a gift or a small price cut. Also confirm the cap: 6% of $312,000 = $18,720, so $7,800 is well within limits.
- Gift funds of $12,200 from a family member, with a gift letter and documented transfer. Conventional loans permit 100% gift funds for the down payment and costs, so this clears both the cash-to-close and reserve gaps without touching price.
- Restructuring the loan. Lowering LTV raises the cash requirement - the wrong direction. FHA at 96.5% would require its own appraisal (the conventional appraisal does not transfer), mortgage insurance, and property-condition compliance; it is a real option only if the buyer qualifies, and it delays closing.
Recommendation: open with the $299,000 reduction (framed as "the appraisal is the market talking"), fall back to a $7,800 credit plus a $4,400 documented gift, and get whichever is agreed into a signed amendment before the financing deadline.
3. If nothing works and the buyer cannot close, does the financing contingency return the earnest money?
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Probably not as written - and that is the trap.
A typical financing contingency is conditioned on the buyer applying in good faith and being unable to obtain financing on the terms stated in the contract. Here the buyer can obtain financing: the lender will approve a loan at the specified 90% LTV of appraised value. The failure is the buyer's cash position, not the lender's refusal. A seller's attorney will argue the contingency is satisfied, the buyer is in default, and the $5,000 is forfeitable.
What actually protects the buyer:
- An appraisal contingency or a loan-amount clause tied to a specific dollar figure rather than an LTV percentage. This contract has neither, which is the drafting failure to learn from.
- A written amendment extending the financing deadline while the parties negotiate the gap. Get the extension signed before the deadline expires; a deadline that passes unextended is a deadline that passed.
- Do not unilaterally terminate on the assumption that "financing fell through" equals automatic EMD return. That call belongs to counsel, and the buyer's agent should say so in writing rather than advise a walk-away.
There is also a leverage argument worth making to the seller: the appraisal is now a known benchmark, the next buyer's lender will likely reach the same number, and refusing $13,000 today risks a $16,000 problem in 60 days. That is advocacy, not a legal conclusion - state it as such.