Low Appraisal, a New Car Loan, and a Deposit the Seller Wants to Keep
Purchase price is $285,000 on an FHA 30-year fixed loan. The buyer is preapproved at 96.5% LTV and 6.25%, DTI 48%. The contract has a financing contingency expiring on day 30, an appraisal contingency, closing on day 45, and $5,000 earnest money held by the listing broker. On day 32 the lender reports an appraisal of $272,000, and the buyer's DTI has risen to 50% because the buyer co-signed a car loan on day 25. No written extension or notice was sent. The seller's agent emails: 'Contingency is over. We close on day 45 or we keep the $5,000.'
1. Compute the appraisal gap and lay out the buyer's realistic options.
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The numbers.
- Original maximum loan: 96.5% x $285,000 = $275,025.
- Maximum loan at the appraised value: 96.5% x $272,000 = $262,480.
- Loan shortfall: $275,025 - $262,480 = $12,545.
- If the price stays at $285,000, the buyer's down payment becomes $285,000 - $262,480 = $22,520, instead of $9,975 - $12,545 more cash, plus closing costs.
Options.
- Bring the gap if the buyer has $12,545 plus reserves. Note that FHA's amendatory clause generally lets a buyer void the contract if the appraisal comes in below price.
- Renegotiate the price to $272,000. The loan becomes $262,480 and the down payment $9,520; the seller nets $13,000 less. Seller concessions cannot cure an appraisal gap.
- Terminate under the appraisal contingency if the buyer gives notice within the contractual window.
- Do nothing and default - the worst option.
The DTI problem is bigger. A 50% DTI may be unapprovable regardless of the appraisal, which pushes the buyer toward the financing contingency, not just the appraisal contingency.
2. Was the financing contingency waived on day 30? Analyze the variables, not just the deadline.
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It depends on the exact contract language. Read the clause, not the calendar.
- If the contract says the buyer must deliver a written notice of loan denial within a stated period, silence generally does not automatically waive the contingency - but the buyer may still be in default if the period has passed and no notice was given.
- If the contract says the loan is deemed approved unless written notice is given by day 30, the contingency is gone.
- The appraisal contingency is a separate, independent escape hatch and may still be open.
The self-inflicted DTI change matters. Co-signing a car loan during the contingency period is a voluntary act that undermines the buyer's position with the seller and the lender. The agent should not help the buyer conceal it; loan fraud ends licenses and careers.
Correct immediate action. Deliver written notice invoking the appraisal contingency and the financing contingency, request a short extension in writing, and offer the seller something (a release of the deposit, a price reduction, or a defined extension) in exchange. Sellers respond better to a written proposal than to silence.
3. Can the seller simply keep the $5,000 deposit on day 45? What should the agent advise about the funds?
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No automatic forfeiture. The deposit remains the buyer's money until a contractual or adjudicated forfeiture event occurs. A seller's email is a negotiating position, not a legal determination.
Broker's duty. The listing broker holds the funds in a trust account, cannot commingle them, and cannot disburse them on one party's demand alone. Disbursement follows the contract's dispute provisions, a written agreement signed by both parties, or a court order. Many contracts authorize the broker to interplead the funds if the parties cannot agree.
Advice to the buyer. Put every notice in writing, keep proof of delivery, and do not let the closing date pass silently. If the seller refuses a reasonable extension, the buyer's remedy is a written demand followed by the contract's dispute process, not an oral argument.