An Appraisal Shortfall, Seller Concessions, and Bad Advice
Buyers are under contract on a $420,000 house, putting 10% down on a 30-year conventional loan at 6.75%. Their middle FICO score is 742. The Loan Estimate shows $14,800 in closing costs, and the buyers have asked the seller to pay $15,000 of them. The appraisal comes back at $402,000. The buyers have $45,000 in cash, $3,000 of which they wanted to keep as reserves. The listing agent tells the buyers' agent not to worry: "the lender will just use the appraised value and everything stays the same."
1. Recalculate the loan-to-value and cash to close, and determine whether the $15,000 seller concession is permissible.
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LTV. LTV is the loan divided by the lesser of the sales price or the appraised value. The lesser figure is $402,000. At 90%, the maximum loan is $361,800.
Down payment and cash. The buyer still pays $420,000, so the down payment becomes $420,000 − $361,800 = $58,200, plus $14,800 closing costs, minus the $15,000 seller credit = $58,000 cash needed. The buyer has $45,000. She is roughly $13,000 short before reserves, and the $3,000 reserve buffer is gone.
The listing agent is wrong. Using the appraised value does not leave everything the same; it shrinks the loan by $16,200 relative to a 90% loan on the sales price and shifts that amount onto the buyer.
Concessions. Conventional limits for a one-unit primary residence at an LTV between 75.01% and 90% cap seller-paid costs at 6% of the price: $25,200. The $15,000 request is well within the limit. Mortgage insurance will still be required because LTV exceeds 80%.
2. The buyers cannot cover the shortfall. Lay out their lawful options and who bears the risk of each.
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Renegotiate. Ask the seller to reduce the price to $402,000, which restores the original economics. The seller may refuse; nothing obligates a reduction.
Bring cash. Use savings, a documented gift, or a retirement withdrawal. Risky if it eliminates reserves.
Secondary financing. A purchase-money second lien is not a Texas home-equity loan, so the 80% cap and fee restrictions do not apply to it, but the first lender's guidelines and the contract must permit it. Get the loan officer's written approval first.
Terminate under the financing addendum. If the lender will not approve the loan on terms the buyer can meet within the deadline, the buyer may terminate and recover the earnest money - but only if she complied with the addendum: applied on time, submitted documents, and did not waive the contingency. If the lender approves the loan and she merely refuses to bring additional cash, there is no financing failure and she is in default, exposing the earnest money to the seller.
3. How should the buyers' agent handle the listing agent's statement, and what should the buyers be told?
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Correct it in writing. The statement is inaccurate, and if the buyers rely on it they may make a $13,000 commitment they cannot fund. Send a written summary of the corrected numbers to both the buyers and the listing agent, and document the date.
Send them to the source. The buyers should get the figures straight from their loan officer in writing. A broker should not give lending advice beyond general mechanics; loan approval, PMI, and concession eligibility belong to the lender.
Manage the deadlines. Confirm the financing deadline and the appraisal contingency language before the buyers decide, and confirm what the earnest money contract says about contract termination versus default. Also remind the buyers that the listing agent represents the seller, is not their adviser, and owes them honesty but not advocacy.