Hello, I was trying to buy a property and everything’s fine until I got the appraisal report. The appraised value is lower than what the lender expected, so the lender lower the loan amount from 80% (which is on the purchase agreement) to 70%.
So my question is if I cancel the deal, would I get my deposit back because I can’t get 80% of the loan?
Earnest monies are put in place to protect the seller if you back out because you changed your mind. I would look closely at the terms of the purchase agreement specifically the conditions for the forfeiture of earnest money. I would also discuss this with your agent if you are using one. Obviously the seller would like compensated for the risk involved in waiting for you to get approved for a loan. Since you are technically approved, but the terms of the loan change due to appraisal it enters that grey area where the seller can refuse to release the EM back to you.
I would have an open line of communication with them and see what compromise you can arrange. Every purchase agreement has its rules and conditions on how earnest monies are dealt.
Everything is negotiable my friend!
Best of Luck!
Hi Fuad, on my purchase agreement it says if this agreement is subject to the BUYER’s ability to obtain a loan and the loan can not be obtained, the BUYER shall get the deposit refund.
So in this case, I’m not able to obtain 80% of the loan, and is that means I’m not satisfied with the loan condition?
I've never heard of a lower loan percent because of a lower appraisal. I assume this lower appraisal came in way under the selling price? (Otherwise the lending shouldn't have been affected at all, even if it appraised at exactly the selling price.). Has the seller agreed to sell to you at the new lower appraised price? (If not, that should be an automatic free out for you and your EMD, although you should be even more interested at the new lower price.)
@Victor Gary Your financing contingency should specify either a $ amount or a percentage. If so, and you can’t get it, then you can walk and get your EM back.
Hi Bill, I'm applying a private loan and the appraised ARV is lower than the lender's expectation, and it caused them to lower the loan amount. Also, the seller refused to lower the selling price. But thanks for your advice!
Thank you Wayne!
The lender is not very good if they didn't explain this to you. It's pretty simple. They are basing LTV on the appraised value not the purchase price. They use whichever is lower, typically. Doesn't your contract have an appraisal contingency as well as a financing contingency? Read your contract, it's all there for you to see if you just read.
All the responder's have valid points, however I do not see any suggestions for a fix.
From the sellers side, the buyer should expect to provide a bank pre-qualification for the amount of the purchase. From the buyer's side, the property is expected to appraise for at least the amount of the purchase.
In this case, the After Repaired Value, ARV, did not rise to the level needed. Why not? What more would the bank require in rehab so that the property would appraise for the needed amount? If the buyer agrees with the additional fixes and their cost, and it does appraise at the needed amount, then the problem is solved.
Your earnest monies should be refunded in this case, because the loan was turned down and that is the language of the agreement. However, the sellers attorney could object on the basis that the base property did appraise, which is the sellers responsibility and the proposed improvements did not bring the needed appraisal amount, which is the buyers responsibility. As there was no contingency for this eventuality, the buyer wins by default.
This situation is a good lesson for sellers who are selling to a rehabber. The seller should not be punished if the rehabber does not make sufficient improvements to satisfy the banking requirements. A contract contingency could be created allowing the seller to keep the earnest money deposit should the improvements not bring the needed ARV. It is prudent for the seller to know enough about the market to properly analyze the improvements and their effect on the value of the property.
From the buyers side, only put down an earnest money deposit that you can afford to lose. I've been involved in hundreds of transactions and have only ever put down $1 as a deposit. Sellers want more but I convince them that I can and will act. So far that has satisfied them. Good luck.
Do you have an appraisal contingency in the contract? If you do, enact that and you should get your deposit back.
If you do not have an appraisal contingency, but only a financing contingency, then you need to make up that 10% difference if you have it. Does not matter if it is funds you do not want to use, if you have the funds, you have to make up the difference. If you do not have any ability to make up the 10%, then your financing contingency may protect you.
It is very important to understand that the contingencies for an appraisal and financing are two completely different things.
@Victor Gary Your financing is not the typical financing situation. You are trying to base your financing on a repaired ARV value, not the Current value. The exact wording of your financing contingency is what matters.