Low Appraisal, an Ineligible Condo Project, and a Lock About to Expire
A first-time buyer is under contract for a $485,000 condominium with 10% down and a conventional loan. The appraisal comes back at $470,000. The report notes the roof has roughly three years of remaining life and flags the project as not reviewable: the condo questionnaire shows 52% owner-occupied units, one investor owning 22% of the units, 18% of units more than 60 days delinquent on HOA dues, and the developer still holding 8% of units in a project completed in 2019. The rate lock expires in 12 days. A re-inspection costs $250 and takes five business days. The seller will not reduce the price but will credit $6,000 toward the buyer's costs. The buyer's $18,000 in gift funds arrived by wire from a friend's business account; the gift letter is signed and describes the friend as a family friend.
1. Recalculate the LTV and lay out the borrower's realistic options.
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LTV is based on the lesser of price or appraised value: $470,000. The planned $436,500 loan (90% of $485,000) is 92.9% of value. Options:
- Bring an additional $13,500 to closing to keep the loan at $423,000 (90%). The $6,000 seller credit helps with closing costs, not the down payment, and the extra cash must be verified and sourced.
- Accept the 92.9% LTV with mortgage insurance if the program permits - but only if the project is eligible.
- Renegotiate the price to $470,000, or ask the lender to run a reconsideration of value with better comps; the originator cannot pressure the appraiser.
- Restructure into a program that allows both the LTV and the project, which may mean FHA with project approval or a portfolio/non-QM product.
Advise the borrower in writing of each option and its cost, and issue a revised Loan Estimate for any changed terms. The buyer should not waive the appraisal contingency without understanding the cash requirement.
2. Evaluate the condominium project's eligibility and what it means for the locked loan.
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Check the project against current agency and investor guidelines rather than eyeballing it. The 22% single-entity ownership exceeds the 20% limit; 18% delinquency exceeds the 15% threshold; 52% owner-occupancy clears the 50% minimum, but with two other failures the project is not deliverable to Fannie Mae or Freddie Mac as-is. The roof with three years of remaining life raises a physical-condition issue; lenders generally want evidence of adequate remaining life or a funded maintenance plan.
The consequence: a conventional loan as locked cannot close. Do not submit it as if it were warrantable. Present the borrower with written alternatives - a different unit in an eligible project, FHA with project approval, or a portfolio/non-QM lender - and disclose that the rate and fees will change. If the loan is denied or restructured, follow the adverse action and re-disclosure rules.
3. What should the originator do about the lock, the re-inspection fee, and the appraisal?
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Twelve days is likely too short for a five-business-day re-inspection plus underwriting and a new CD waiting period. First determine which project path is viable; ordering a $250 re-inspection on a project that cannot be delivered wastes the borrower's money. If the roof is the only remaining issue, order the re-inspection and a contractor's or engineer's report, and price any lock extension in writing.
Third-party fees cannot simply be charged. The appraisal condition is a valid changed circumstance that permits a revised Loan Estimate, and the fee must be disclosed and stay within tolerance. The borrower must receive a copy of the appraisal no later than three business days before consummation. Appraisal independence rules prohibit the originator from selecting a different appraiser to get a better number or from suggesting a target value; a value dispute must go through the lender's formal reconsideration process with documentary support.
Finally, the gift from a friend's business account needs source documentation and a determination that it is an acceptable gift source, not a loan.