Low Appraisal, Gift Funds, and Seller Credit
Buyer Marcus is preapproved for a $260,000 purchase. He has saved $14,000 and his parents will give him $12,000 as a gift. The lender requires a 10% down payment, a 5% borrower own-funds contribution, a gift letter, and mortgage insurance if the loan-to-value ratio exceeds 80%. Marcus's debt-to-income ratio is 41%. The contract price is $260,000; the appraisal comes in at $248,000. The seller refuses to lower the price but will credit $8,000 toward Marcus's closing costs. Marcus's agent wants to know whether the deal can still close.
1. Calculate the maximum loan amount, the required down payment, and the LTV based on the appraisal. Can the gift be used as Marcus proposes?
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Lenders base the loan on the lesser of the contract price or appraised value. Here the appraisal is $248,000, so the maximum loan at 90% LTV is 0.90 × $248,000 = $223,200. The down payment needed is $260,000 − $223,200 = $36,800, or 14.15% of the price, even though the loan is 90% LTV. Mortgage insurance is required because LTV exceeds 80%. Cash needed also includes closing costs and prepaids.
Marcus has $14,000 of own funds plus a $12,000 gift = $26,000, leaving a $10,800 down-payment gap before closing costs. The gift may be used with a signed gift letter, donor documentation, and proof of transfer, but the lender's 5% own-funds rule requires Marcus to contribute at least $13,000 of his own money; his $14,000 satisfies that own-funds test, but the gift cannot fill the entire gap.
2. What options does Marcus have to close the gap, and how does the $8,000 seller credit affect the analysis?
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Options: (a) bring an additional $10,800+ in cash; (b) negotiate a price reduction to $248,000 or a seller credit that reduces cash needed; (c) request a reconsideration of value or a second appraisal with evidence of comparable sales; (d) use a loan program allowing a higher LTV, such as 95%, if he qualifies and accepts mortgage insurance; or (e) terminate under the appraisal contingency if timely.
The $8,000 seller credit can pay closing costs, prepaids, and allowable interest, but it cannot reduce the loan-to-value calculation or be used as the down payment. The lender also caps seller concessions-often 3%, 6%, or 9% depending on LTV and program-so $8,000 (3.08% of price) must fit the applicable cap. The credit does not create equity or change the appraised value.
3. What are the risks if Marcus waives the appraisal contingency to save the deal?
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If Marcus waives the appraisal contingency, he loses the right to terminate or renegotiate because the property appraised below price. The lender will still lend only on the $248,000 value, so Marcus must cover the $10,800+ gap and closing costs in cash. If he cannot, he may lose the earnest money and face a seller claim, unless a separate financing contingency still applies.
Waiving also increases his risk if he later discovers the property is overpriced. He should not waive until he has a written lender commitment and proof of funds for the gap.