Q: How does the appraisal process affect buyers and Sellers?
A: In a purchase transaction where the buyer is using bank financing, the lender will require an appraisal to be completed. A satisfactory appraisal is one of the conditions of final loan approval by the lender. When the appraisal value is at or greater than the contracted purchase price, the appraisal condition is satisfied.
When the appraisal value comes in below the contracted purchase price, it can create problems. With a traditional loan consisting of 20 percent down to 80 percent loan, the lender will only lend up to 80 percent of the purchase price.
For example, a contracted purchase price of $1 million implies a loan of $800,000. If the appraisal shows a value of $900,000 the bank will only lend 80 percent of that figure ($720,000). There is a shortfall of $80,000.
This shortfall can be addressed through the buyer contributing more cash, or through a renegotiated sales price with the seller. In our current inventory-starved market, renegotiating the purchase price with the seller will be very difficult.
Higher down payments can enable buyers to avoid appraisal problems. Many buyers have used high down payments and indeed 100 percent cash to avoid appraisal problems. – Coldwell Banker
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