The Appraisal Came in Low-What Now? This Can Fix The Problem

You are buying a fixer home that needs updating and your home loan is preapproved, you have your proof of funds squared away and than bam….the home doesn’t appraise for the agreed upon purchase price.  So how do you fix a low appraisal problem?

The seller is willing to renegotiate and meet you halfway on the difference but that money was to be used for home improvements and now your plans are in shambles. Now what?

There is another way here that no one seems to be talking about.  Change the loan to an FHA 203k!  Add some home improvement items that need updating ie..carpet, countertops, cabinets and paint, get a bid for the work and have the home re-appraised by another appraiser.  The FHA 203k allows for a 10% “fudge factor” so if the appraised value vs. purchase price is less than a 10% difference you can possibly save a deal especially on a fixer home where the homebuyer needs to keep as much personal funds as possible for home improvements.

Here’s how it works.  The 203k Streamline loan allows for up to $35k in repairs to be added to the purchase price of the home for remodeling purposes.  You obtain the purchase loan and remodeling funds all in one loan . The 203k loan has two appraisal figures on it’s appraisal instead of just one like a normal appraisal.  One value is the “as-is” value.  The other is a value including the repairs you are going to do to the home.

Let’s take a purchase price of $275,000.  The home appraisal comes in low at $268,000 using a conventional loan appraisal.  Flipping the loan to a 203k Streamline loan would trigger a new appraisal.  Let’s say the new 203k loan appraisal comes in at $268,000 as well,  that’s the “as-is” value. The seller will renotiate down to $271,00 and you’re left with coming up with $4,000 and you’re willing to do that since it’s a good deal, but now you’re also $4,000 short on home improvement funds. You can qualify for a slightly mortgage payment but you’re short on repair funds and you’re operating on a dime.  But with the 203k Streamline loan adds funds to your loan balance to do repairs and home improvements.  So now you’ve decided to add new countertops, cabinets, carpet and paint.  The total of updated improvements comes out to $20,000 which is double the home improvement budget you were planning to use (your own funds) and you can now hang on to that money.  The appraiser takes these improvements into account, and gives an after improvement value of $275,000.  Problem solved!

Granted the borrower is going to have to requalify for a higher loan amount.  If they were putting forth a down payment of 10% on the initial offer of $275,000 that would be $27,500 and a loan amount of $247,500.  On the 203k loan, the new loan amount is $259,200 ($268,000, new as-is appraised value + $20,000 in remodeling= $288,000 -10% down payment $28,800).  So the monthly payment may be $65.00 higher per month but……….they got upgrades financed into their loan at a low fixed rate, AND where else would they find a way to finance remodeling these days with having 10% equity/down payment?  HELOC lenders now require 25% equity before they’ll talk to you.

It’s a win-win for all involved.  Keep this option in mind when you have a low appraisal issue.  The seller sells their home and doesn’t have to relist it, and if that buyer really wants that house and they don’t have or want to come up with the full cash difference out of pocket to make it happen, think of the 203k Streamline. It can be used for remodeling financing and a deal saver at the same time.

If you have a question in regards to this article please click here and let me know your scenario!

Best,

KW

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12 Comments

  1. Posted May 3, 2011 at 12:29 pm | Permalink

    Great idea with the low appraisal, Kevin. Love the idea of flipping it into a 203k and making improvements and upgrades. Hopefully Southern California gets on board! Cheers!

  2. Rug Appraisal Los Angeles
    Posted May 3, 2011 at 10:01 pm | Permalink

    This sounds like a great little secret. My sister is in this exact predicament and trying to find a way out. You provide a very convincing article however, I’m confused on the benefits. If qualified, she would get a higher loan amount, pay a higher down payment, and pay a higher loan payment? Where did I miss the benefits?

  3. Kevin Walton
    Posted May 9, 2011 at 8:49 pm | Permalink

    The benefit is for the buyer who doesn’t have their own cash to do the fix-its or upgrades. They finance it. It’s like getting a home equity loan upfront when you buy the home accept it’s at a lower fixed rate term, plus you can’t a home equity loan anymore unless you have 25-30% equity in the home. So someone putting 3.5% down on a home in this market will have to wait quite a while before any equity starts to build. This loan solves that problem.

  4. Katie
    Posted May 19, 2011 at 11:56 am | Permalink

    I have a question. I am buying a HUD forclosure in Illinois as my first home. The home “as is” is 60k when I add repairs the total purchase price is 87k. I’ve had appraisal issues since the appraiser had never done a 203k before. His final after repair appraisal came back at 85k. My loan should still go through because a 2k difference is well within the 10% fudge factor, correct?

  5. Kevin Walton
    Posted May 19, 2011 at 9:41 pm | Permalink

    Hello Katie,
    You use the lower of two figures. 110% of the after improved value (deemed by an appraiser) or the as-is value + the dollar amount of the repairs WHICHEVER IS LOWER.
    In your example, lets just say that the after improved value comes to $75k. Take $75,000 x 110% and that’s $82,500. That’s one figure. Than take the as-is value $60,000 + $27,000 = $87,000.
    So you take the lower of the two figures being $82,500 as being the final value. Your purchase price stays at $60k it does not change. Your down payment is based on the $82,500 so if you’re putting a down payment of 5% for example it’s 5% of $82,500 not $60,000. I’ve seen some sellers see that the home value increases after repairs and they want to renegotiate. This shouldn’t be an option. If the purchase price is $60k, it stays at $60k. You will owe more than the house is worth for awhile, but you’ll also have brand new upgrades to show for it.

  6. Posted June 15, 2011 at 2:56 pm | Permalink

    Yep. It’s part of the game.

  7. Posted June 20, 2011 at 5:37 am | Permalink

    One of the most important factors in the mortgage process is a number called the “loan-to-value ratio.” In connection with a refinance, that number is the loan amount divided by the appraised value. For a purchase, that number is loan amount divided by the lesser of the purchase price or the appraised value. This number, commonly referred to as LTV in the industry is determinative of many things in connection with a mortgage.

  8. Posted June 20, 2011 at 5:43 am | Permalink

    I love the idea of the low appraisal.The listing agent and / or buyer’s agent can discuss the appraisal with the appraiser and provide comps other than the ones selected by the appraiser for consideration.

  9. Posted June 20, 2011 at 5:45 am | Permalink

    When I bought my house in 1999 the appraisal came it low, my realtor made a call and brought in a new appraiser and the mortgage was approved.
    You could get another appraisal, but you may have to have a connection to get the number you want.
    Try calling the realtor that sold you the place and see if they think they can help.

  10. Posted June 29, 2011 at 7:17 pm | Permalink

    Great post. I think that most people are unaware of this loan, so that’s why it’s not offered. I’m still learning about the 203K loan so your site is helping me out greatly. Thank you!

  11. Posted August 15, 2011 at 5:22 pm | Permalink

    I just started doing research on the 203k home loan. I’m surprised I had not heard of it before. This is a lot of great information that more people should know about. I will pass it on. Good work!

  12. Posted August 30, 2011 at 7:36 pm | Permalink

    The 203K loan sounds good, I think this might be just what I need! Thanks for the info, I didn’t know much about this before but I think it’ll work out nicely with my situation. 🙂

    ~Kayla

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