Waiving the appraisal contingency makes the offer more favorable for the seller in the event the property appraises for less than the sales price.  The FNMA/FHLMC guidelines mandate that the loan to value (LTV) be determined based on the LOWER of the appraisal or sales price.

 

 

If the appraisal comes in lower than the purchase price, they will have to come up with additional dollars to keep the transaction at the purchase price agreed upon.
 
Also, they will not be able to go back to the seller and state, “The appraisal came in low and I want to renegotiate the price." While it is rare that appraisals come in less than the sales price, it is good to know how the numbers will work out:
 
Let’s assume a single-family home is listed at $625,000 and the borrower makes an offer at $660,000 (approximately 5.3% higher than the list price).  The borrower plans to put down 20% or $132,000 and the loan amount is $528,000 (80% of the proposed purchase price of $660K).  Let’s assume the property appraises for $650K.  The lender will now use the LOWER of the appraisal or purchase price to establish the loan to value (the purchase price on the P&S remains at $660,000 as agreed to by waiving the contingency).  The lender will now lend 80% of the $650,000 appraisal or a mortgage of $520,0000.

 

 

Purchase Price $660,0000
Less Mortgage Amount ($520,000) (calculated based on the appraisal x 80%)
Down payment necessary $140,000

 

If the home appraised at the agreed purchase price, the borrower would need $132,000 for the down payment.  The low appraisal increases the down payment in this example by $8,000 (this is also reflected by the change in loan amounts; from an original loan amount of $528,000 to a reduced loan amount of $520,000).
 
Waiving the appraisal contingency can certainly put an offer in a more favorable light (than one with an appraisal contingency), as the seller has the assurance that the price agreed on will stand and not be renegotiated after appraisal.

 

 

If you're interested in learning exactly how waiving an appraisal would impact your offer and mortgage contact the Liz & Ellie team, and we'll answer all your questions.

 

Photo credit: Alain Pham