In times when home prices are rising quickly, multiple offers are coming in on a listed property and buyers are having to offer above asking price, it is important to keep in mind the 4 choices which are available to a homebuyer who is obtaining financing:
A key thought in the mortgage industry is that the "value" of the home is the LESSER of the purchase price or the appraised value. In other words, whichever is LOWER (the purchase price or the appraised value), THAT is the number which the lender works the loan off of.
In this example, let's just assume that the purchase price is $200,000 and the home appraises for $180,000. Let's also assume the loan is a VA loan and we are going 100% financing with no money down. On VA loans, the lender gives 100% of the LESSER between the purchase price or appraised value.
In this example, the lender would give the veteran a loan of $180,000. Even though the purchase price is $200,000, the lender would still only give $180,000. Now, we have 4 choices:
1) The seller comes down to $180,000.
2) The buyer comes up with the shortage ($20,000)
3) The buyer and seller meet somewhere in the middle
4) The entire deal is off (it would be important to notate that a VA appraisal attaches to the home for 6 months. In other words, if another VA buyer comes along within the next 6 months, then this appraisal of $180,000 must be used. If a buyer comes in to go FHA, Conventional or USDA, then this appraisal of $180,000 would not be used and an entirely NEW appraisal would be ordered).
For questions, additional scenarios or to get your buyers Pre-Approved today -- call me at 1-216-780-1103. I am not only a loan officer, but I am also an underwriter who owns the company and is a direct lender for VA, FHA, USDA and Conventional.