PMI Math After a Low Appraisal
Buyer Alana is under contract on a condominium at $340,000 and plans 10% down ($34,000), financing $306,000 with a 30-year conventional fixed loan. The appraisal comes back at $328,000. Alana's lender quotes two programs: a 30-year fixed at 6.50% and a 5/1 adjustable-rate mortgage at 5.25%. The lender also requires private mortgage insurance at this loan-to-value. The seller has agreed in the purchase agreement to pay up to 3% of the purchase price toward Alana's closing costs. Alana asks her agent whether she can use the seller credit to cover the cash she is suddenly short, and how soon she can get rid of the mortgage insurance.
1. What is the maximum loan Alana can obtain at 90% loan-to-value, and what does that do to her cash requirement?
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The loan shrinks by $10,800 and Alana must bring that much more cash.
- Lenders underwrite on the lesser of the contract price or the appraised value: lesser of $340,000 and $328,000 = $328,000.
- Maximum loan at 90% LTV = 0.90 × $328,000 = $295,200.
- Alana planned to borrow $306,000, so she is $306,000 − $295,200 = $10,800 short.
- Her down payment effectively rises to $340,000 − $295,200 = $44,800 (13.2% of price), and the LTV measured against appraised value is exactly 90%.
- Options: bring the extra $10,800 in cash, renegotiate the price to $328,000, or accept a higher-rate loan program with a lower LTV requirement. The one thing she cannot do is borrow past the lender's 90% ceiling on the appraised value.
2. Using the appraisal, when can Alana request cancellation of PMI and when must it terminate automatically?
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"Original value" is the lesser of price or appraised value - $328,000 - not the $340,000 price, and not today's market value.
- Borrowers on a conforming conventional loan may request cancellation in writing when the principal balance reaches 80% of original value, with a good payment history and satisfaction of the servicer's conditions.
- 80% × $328,000 = $262,400.
- PMI must terminate automatically on the date the balance is scheduled to reach 78% of original value under the original amortization schedule.
- 78% × $328,000 = $255,840.
- Both thresholds are measured against the scheduled balance, not payoff or a new appraisal, so appreciation will not accelerate the date. (Loans are also generally subject to final termination at the midpoint of the amortization period regardless of LTV.)
- Because Alana is starting at 90% LTV, she should expect PMI for several years; a shorter amortization or extra principal payments shorten the wait only by reaching the scheduled balance early.
3. Can Alana apply the seller's 3% credit toward the cash shortfall or the appraisal gap?
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No - the credit is capped, and it is restricted to closing costs, not down payment or price gap.
- 3% of the $340,000 price is $10,200. For a conventional loan at 90% LTV, the maximum interested-party contribution is 6% of the price ($20,400), so $10,200 is within the limit and is permissible.
- But seller concessions may be applied only to actual closing costs, prepaid items, and in some cases a rate buydown - never to the down payment, and never to bridge the gap between appraised value and price.
- If Alana's allowable closing costs total less than $10,200, the lender will typically reduce the credit to the actual amount, with the excess flowing back as a price reduction.
- Nor does the credit change the appraised value: the $12,000 appraisal gap and the resulting $10,800 cash shortfall must be solved with Alana's own funds or by renegotiating price - not with seller money, which the lender would have to count against the concession cap anyway.