Low Appraisal on a 90% Loan
A buyer contracts to purchase a home for $360,000. The buyer is approved for a 90% loan-to-value conventional loan and has $44,000 total cash available, including an estimated $8,000 in closing costs. The appraisal comes back at $342,000. The lender will lend the lesser of 90% of the purchase price or 90% of the appraised value. The seller offers a $10,000 seller concession to "make the deal work." The buyer asks whether the concession solves the problem and whether mortgage insurance will be required. Closing is in 18 days, and the buyer does not want to lose the $7,000 earnest money.
1. Calculate the lender's maximum loan and the buyer's cash gap. What happens if the seller reduces the price to $342,000?
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The lender compares 90% of price ($324,000) with 90% of appraised value ($307,800) and uses the lower figure, so the maximum loan is $307,800. At the $360,000 price, the buyer needs $52,200 for the down payment plus $8,000 closing costs, or $60,200 total. The buyer has $44,000, leaving a $16,200 gap. If the seller reduces the price to $342,000, the loan stays at $307,800 because 90% of $342,000 is $307,800. The down payment drops to $34,200, and with $8,000 closing costs the buyer needs $42,200. The buyer has $44,000, so the deal fits with about $1,800 to spare. A price reduction is therefore far more effective than the same dollar amount of seller concession.
2. Does the $10,000 seller concession solve the cash problem? Explain how concessions are treated.
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No. A seller concession is generally a credit toward the buyer's closing costs and prepaid items, not a substitute for the down payment. If the price stays at $360,000, the buyer still must cover the $52,200 down payment because the lender will not lend more than 90% of the appraised value. The $10,000 credit can cover the $8,000 closing costs and part of prepaids, but it does not reduce the $52,200 principal gap. Even after applying it, the buyer is still short roughly $8,200 against the $44,000 available. The lender may also cap seller concessions based on loan type and LTV, so the buyer's agent should confirm the allowable amount with the lender. The concession is not a cure for a low appraisal.
3. The buyer asks whether mortgage insurance will be required and whether it can be removed later. What should the licensee explain?
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With a 90% LTV loan, the lender will almost certainly require private mortgage insurance because the loan exceeds 80% of the home's value. PMI adds to the monthly payment and does not close the cash gap. Under federal rules for conventional loans, the borrower can generally request cancellation when the loan balance reaches 80% of the original value based on the original amortization schedule, and automatic termination occurs at 78%, subject to lender requirements and payment history. A new appraisal may allow earlier removal if the home has appreciated, but the lender controls that process. The licensee should not quote an exact PMI rate; the loan officer should provide a Loan Estimate and an amortization schedule so the buyer can see the real monthly cost and the cancellation timeline.