Low Appraisal, a Questionable Flip Comparable, and a Roof Repair
Purchase contract is $365,000 with 95% LTV. The appraisal comes in at $352,000. The appraiser applies a $22,000 downward market-conditions adjustment and uses four closed sales, all 6–9 months old; one is a flip bought 60 days earlier for $210,000 and resold for $318,000 after cosmetic work. The subject is reported as a 4-bedroom, but county records show 3 bedrooms and no permit for a fourth. The appraisal notes the roof is ‘at the end of its useful life’ and requires certification that it has at least two years remaining. The purchase contract includes a $6,000 seller credit for a roof. The borrower has $8,000 after closing; a roof replacement bid is $14,000. The loan officer wants to use the $365,000 contract price because the seller will not reduce it.
1. What value should you use, and what appraisal review steps are needed?
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Use the lower of the contract price and the appraised value, which is $352,000, unless the appraisal is corrected through review. The contract price is not usable merely because the seller refuses to reduce it. Before accepting $352,000, review the appraisal: four sales that are 6–9 months old in a declining market may be stale, and the $22,000 market-conditions adjustment is large enough to require support. The flip comparable needs verification of the improvements and the resale history; a $108,000 increase in 60 days after cosmetic work may not reflect the subject. The bedroom discrepancy is also material: if the fourth bedroom is unpermitted, the appraiser must correct the report and consider the value impact. Order a field review or a second appraisal if the value is not adequately supported. At $352,000, 95% LTV gives a maximum loan of $334,400 and a required down payment of $30,600, not $18,250.
2. How does the roof condition affect approval and the borrower’s funds?
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The roof must either be certified as having at least two years of remaining useful life or be repaired before closing. If a repair escrow is used, a common requirement is 1.5 times the bid, or $21,000 for a $14,000 roof. The borrower has $8,000 after closing and the seller credit is $6,000, for $14,000 combined; even if the credit could be applied to the repair, the total is below the $21,000 escrow and the borrower lacks reserves. The seller could complete the roof before closing and provide an invoice and warranty, the price could be reduced, or the borrower could bring additional verified funds. If none of those occurs, the file should be suspended or denied because the required repair is not funded.
3. If the appraiser revises the value to $365,000 after review, does that resolve the file?
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It resolves the value gap but not the roof or the funds. At $365,000 and 95% LTV, the maximum loan is $346,750 and the down payment is $18,250, which is closer to the borrower’s resources. The $6,000 seller credit can help with closing costs, but it cannot be used to meet the down payment and may be limited by the actual closing costs. The roof condition still requires certification or repair, and a $21,000 repair escrow is still beyond the borrower’s $8,000. The file can close only if the roof is certified with two years remaining, completed by the seller before closing, or covered by an escrow the borrower can actually fund. A value revision alone does not cure a health-and-safety repair condition.