Appraisal Gap on a $260,000 Contract
Kwame is preapproved for a 30-year conventional loan at 6.5% with 20% down. He is under contract to buy a $260,000 house in Lexington and plans to put down $52,000 with a $208,000 loan. The appraisal comes in at $235,000, supported by three closed sales of $228,000, $245,000, and $240,000. The lender will lend 80% of the lesser of the contract price or the appraised value. Kwame has $60,000 in savings; his estimated closing costs are $7,500. The seller, who has already moved out of state, will not reduce the price but offers to carry back a second mortgage for the difference at 8%.
1. Compute the maximum first mortgage and the cash gap Kwame now faces.
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The lender does not lend on the price; it lends on the lesser of price and appraised value - here $235,000.
- Maximum first loan: 80% × $235,000 = $188,000.
- Required down payment: $260,000 − $188,000 = $72,000.
- Total cash at closing: $72,000 + $7,500 = $79,500.
- Cash available: $60,000.
- Shortfall: $19,500.
His original plan - $52,000 down, $208,000 loan, $59,500 total cash - died with the appraisal. Note what the appraisal did and did not do: it did not change the contract price or the value of the house to Kwame, it changed how much of that price a lender will finance. He must either find $19,500, restructure, renegotiate, or use an appraisal contingency.
2. Evaluate the seller's offer to carry back a second mortgage for the gap.
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It can be made to work, but Kwame should see exactly what he is buying into.
- Combined loan-to-value: ($188,000 + $19,500) ÷ $235,000 ≈ 88.3%. The first lender must approve the second lien, will require it to be subordinate, and will typically restrict prepayment penalties or negative amortization on it.
- He would pay $260,000 for a house appraised at $235,000 - a $25,000 premium. If the market genuinely supports $260,000, the appraisal is the problem. If it does not, the seller-financed second is simply financing an overpayment at 8%, and Kwame is the one holding the risk if he must sell in a soft market.
- The second is small and short-term. The practical question is whether he can refinance or pay it off once the equity picture catches up.
Reasonable paths, in order: request a reconsideration of value through the lender; renegotiate the price toward the appraisal; accept the carryback only if he is comfortable with the premium and the rate; or invoke an appraisal contingency and walk. What he should not do is let the seller's convenience decide the question for him.
3. Kwame wants to 'fight the appraisal.' What can he legitimately do, and what will not work?
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He can ask, but not by calling the appraiser. Federal appraiser-independence rules bar anyone with an interest in the transaction - the buyer, the agent, the loan officer - from pressuring or instructing the appraiser. Contact goes through the lender.
The legitimate route is a written reconsideration of value request submitted to the lender, identifying specific data the appraiser missed or mis-analyzed: closed sales in the same subdivision, similar gross living area, condition, and lot, within the last six to twelve months, with the adjustments explained. Underwriters respond to data, not frustration.
What will not work:
- The listing agent's comparative market analysis - that is a broker's opinion of price, not an appraisal.
- The contract price alone, or 'the seller won't come down.'
- Anecdotes about the neighborhood or a Zestimate.
If the appraiser's three closed sales at $228,000–$245,000 are the best available evidence, the value stands, and Kwame's real decision is the $19,500 gap, not the appraisal.