The 80% or 90% Decision and a Short Cash Gap

Loan amount: $415,000 × 80% = $332,000.

Principal and interest at 6.5%, 30 years: using the amortization factor of $6.3207 per $1,000 borrowed - 332 × 6.3207 ≈ $2,098.

PITI:

• Taxes: $4,800 ÷ 12 = $400
• Insurance: $1,800 ÷ 12 = $150
• HOA: $45
• Total housing payment = $2,098 + 400 + 150 + 45 = $2,693

Ratios:

• Front-end: $2,693 ÷ $9,400 = 28.6%
• Other debt: $480 + $260 + $85 = $825
• Back-end: ($2,693 + $825) ÷ $9,400 = $3,518 ÷ $9,400 = 37.4%

Judgment: against the old 28/36 benchmark this is a marginal fail on both counts, but 28/36 is a guideline, not a statute. Modern conventional underwriting through an automated system routinely approves DTI into the mid-40s with compensating factors (this borrower has 20% down and reserves). The honest answer is likely approvable, but with less margin than the buyers think - and the ratios can be improved cheaply by retiring the $260 student loan, which drops the back-end to about 34.7%. Do not promise approval; the lender's overlays and the AUS findings control.

Cash required at 80% LTV:

• Down payment: $415,000 × 20% = $83,000
• Closing costs and prepaids: 2.5% × $332,000 = $8,300
• Reserves: 2 × $2,693 = $5,386
• Total = $96,686

That is $686 short of $96,000 before anyone looks at the wire.

The wire is the bigger problem. Undocumented funds are not usable for down payment, closing costs, or reserves. The lender will require a gift letter, evidence of the donor's ability to give, and a paper trail from the father's account. Until that exists, treat only $87,000 as verified - a $9,686 gap, which blows up the 80% plan.

Options, in order of practicality:

1. Document the gift (fastest fix if the father cooperates) - the gap shrinks to the original $686, easily covered by a small seller credit or a modest reduction in the purchase price.
2. Drop to 90% LTV: loan $373,500, down $41,500, costs $9,338, PMI $146/mo. Housing payment becomes $2,361 + 400 + 150 + 45 + 146 ≈ $3,102, back-end ≈ 41.8%, and reserves ≈ $6,204. Total cash ≈ $57,000 - comfortably inside the verified $87,000, at the cost of roughly $1,750 a year in PMI.
3. Ask for a seller concession to cover costs - note the contract already contemplates concessions, and the appraised value must support the price.

The right recommendation is to solve the gift documentation first, because it preserves the 20% down option and avoids PMI permanently.

The rule: loan-to-value is calculated on the lesser of the contract price or the appraised value. At $405,000, 80% LTV supports a loan of only $324,000 - $8,000 less than the $332,000 they expected. The down payment effectively becomes $91,000 against a $415,000 price.

Consequences:

• Their cash need rises by $8,000 plus the shortfall already identified - they cannot close as structured.
• The financing contingency is triggered once the lender issues a denial or the appraisal condition cannot be met. That gives them the contractual right to renegotiate or terminate and recover earnest money, provided they act within the contingency period and give the required notice.
• If they still want the property, 90% of the appraised value is $364,500, which is 87.8% of the price - PMI applies and the payment jumps accordingly.

Realistic choices:

1. Renegotiate the price to $405,000 using the appraisal as leverage - the cleanest outcome, and the seller's alternatives are limited once the appraisal is in the file.
2. Pay the gap in cash - they do not have it unless the gift is documented, and even then it consumes reserves.
3. Restructure at 90% LTV and accept PMI until the loan amortizes or is reappraised to 80%.
4. Terminate on the contingency and recover the deposit.

Do not overlook: a low appraisal also affects the seller's disclosure obligation and any future listing price, and an FHA/VA appraisal would carry additional repair and value conditions.