The Appraisal Came In Twelve Thousand Short

The gap is $400,000 − $385,000 = $15,000, but the more important number is the loan-to-value recalculated on the appraised value: $320,000 ÷ $385,000 = 83.1%, which is above 80%. That single fact changes the deal even if the gap is closed.

Options:

1. Renegotiate the price to $385,000. Cleanest fix; restores 80% LTV on a $308,000 loan. Requires the seller's consent and may cost time the 12-day rate lock cannot absorb.
2. Bring cash to the table. The buyers would need roughly $15,000 more than planned plus preserve reserves - with $85,000 liquid against a $80,000 down payment plus closing costs, they have limited cushion.
3. Reduce the loan to $308,000 (80% of appraised value) and cover the difference in cash. Keeps them out of mortgage insurance but increases cash need.
4. Keep the $320,000 loan and accept PMI. At 83.1% LTV, borrower-paid mortgage insurance (illustratively ~0.5% annually, roughly $133/month) applies until the balance amortizes to 80% LTV.
5. Challenge the appraisal through the lender's reconsideration process with better comps - worth attempting, but cannot be relied on inside a 20-day closing.
6. Change loan structure - a different program or a higher-LTV loan with insurance - which restarts underwriting and probably breaks the lock.

Advise the buyers of the true cash-to-close under each path before they respond to the seller. Do not tell them the appraisal "is wrong" as a fact; the agent's role is to supply data to the lender, not to pressure the appraiser.

Probably not at $12,000, and certainly not as a down-payment subsidy.

The governing concept is the interested-party contribution (seller concession) limit, which is tied to LTV and occupancy:

• LTV above 90%: 3% of the sales price.
• LTV above 75% up to 90%: 6%.
• LTV 75% or below: 9%.
• Investment properties: 2%.

Here, on the appraised value, LTV is 83.1% - in the 6% band. Six percent of $400,000 = $24,000, so a $12,000 credit (3%) is numerically inside the cap. But the cap is not the binding constraint; the actual closing costs are. Seller credits may not exceed the buyer's actual closing costs and prepaids, and may never be applied to the down payment or to reserves. A $12,000 credit only works if the buyers genuinely have $12,000 of allowable costs to absorb - often they do not on a transaction this size.

Other limits to check before promising anything:

• The lender's own underwriting and any investor overlays.
• Whether the credit is structured as a price reduction instead (which changes the LTV math and may fix the appraisal problem better than a credit).
• Appraisal and underwriting must be re-run if the price changes.

Best answer to the agent: a price reduction to $385,000 with a modest credit is more effective than enlarging a credit the buyers cannot use.

Housing expense (PITI + MI):

• P&I on $320,000 at 6.75%, 30 years: approximately $2,076
• Taxes: $340
• Insurance: $95
• Mortgage insurance at 83.1% LTV: approximately $133
• Total: about $2,644

Front-end ratio: $2,644 ÷ $9,200 = 28.7%

Total debt: add $520 car + $180 student loan = $700 → $3,344

Back-end ratio: $3,344 ÷ $9,200 = 36.3%

Interpretation: on paper the buyers fit comfortably - under the 43% back-end ceiling commonly used and near the traditional 28/36 benchmark. So the problem in this file is not income; it is equity, cash, and time. That is the judgment the exam is testing: an agent who hears "36% DTI" and relaxes has missed that the deal fails on LTV and cash to close.

What to watch:

• If the buyers take the $320,000 loan at 83.1% LTV, PMI is permanent for a period, and the front-end ratio rises to a level some lenders treat as an overlay trigger.
• If they instead reduce the loan to $308,000, the P&I drops (about $1,998) and MI disappears - mathematically better, but the cash requirement rises.
• Reserves: lenders typically want 2 months of PITI after closing; verify against the $85,000.
• The 12-day rate lock is the real risk. A lock extension costs money and must be priced and disclosed to the buyers now, not at the closing table.