Appraisal Gap and Two Tax Lines
Priya is a broker at Granite City Realty in St. Cloud. Her buyer client, Marcus, is under contract to buy a duplex for $425,000. The purchase agreement has a conventional loan at 80% loan-to-value, a financing contingency, and a $5,000 seller credit toward buyer closing costs. Marcus was preapproved for a $340,000 loan. The appraisal comes in at $410,000. The lender will lend 80% of the appraised value. Marcus has $85,000 for down payment, $9,500 for closing costs, and $3,200 for prepaids, plus a $10,000 gift from his parents that has been documented with a gift letter. The seller will not reduce the price. The closing is in 14 days. Marcus asks Priya to 'make the numbers work' and asks who pays the deed tax and mortgage registry tax, and how much those taxes are.
1. Calculate Marcus's new loan, the appraisal gap, and the cash he needs at closing.
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The lender will base the loan on the lower of price or appraised value. At 80% of $410,000, the maximum loan is $328,000. Marcus originally expected $340,000, so the loan drops by $12,000. His down payment rises from $85,000 to $97,000. Cash needed at closing: $425,000 price minus $328,000 loan = $97,000 down; plus $9,500 closing costs; plus $3,200 prepaids; minus $5,000 seller credit; minus $10,000 documented gift = $94,700. Without the gift, he would need $104,700. The extra $12,000 is the appraisal gap. Marcus should confirm with the lender whether the gift is acceptable, whether the seller credit can be used for prepaids, and whether any reserve requirement applies. If he cannot cover the gap, options include renegotiating price, a different loan product, a second appraisal, or canceling under any appraisal contingency. Priya should not assume the financing contingency will protect him if the lender still approves a lower loan; the contract language controls.
2. Calculate the Minnesota deed tax and mortgage registry tax, and explain who typically pays each.
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Minnesota deed tax is 0.33% of the consideration for the transfer. On $425,000: $425,000 x 0.0033 = $1,402.50. The deed tax is generally the grantor's (seller's) obligation, but the parties can negotiate who pays; the closing statement should show the agreed allocation. Mortgage registry tax is 0.23% of the principal debt secured by the mortgage. If the loan is $328,000: $328,000 x 0.0023 = $754.40. If the loan had stayed at $340,000, the tax would be $782.00. Mortgage registry tax is typically paid by the borrower. These are state taxes; county recording fees and other closing charges are separate. Priya should verify the final figures with the closing agent because the taxable amounts depend on the final loan and consideration, and because rounding or county practices can affect the statement. She should explain the concepts but not give tax advice; Marcus should confirm with the closing agent or a tax adviser.
3. What can Priya do, and not do, to 'make the numbers work'?
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Priya cannot 'make the numbers work' by misstating the loan, hiding the appraisal gap, or promising funds she does not control. She can help Marcus compare options: ask the lender about a lower down payment program, seller-paid points, or an appraisal reconsideration; ask the seller to reduce the price or carry a second note; use the documented gift if the lender allows; or cancel if the contract has an appraisal contingency. She should review the financing and appraisal contingency deadlines and put any extension in writing. She must not tell the seller that Marcus has more cash than he does, disclose his private financial situation without consent, or pressure him to waive the financing contingency without explaining the risk. She should also avoid giving legal or tax advice about the gift. If Marcus cannot close, the earnest money and cancellation rights depend on the contract. Priya's role is to coordinate, document, and refer Marcus to the lender, an attorney, and a tax adviser.