Use This Winning Strategy To Handle Appraisal Gaps

Tim O'Leary, VP of Mortgage Lending at Guaranteed Rate, explains a smart way to deal with appraisal gaps using mortgage insurance.

In the current seller’s market, low housing inventory means that purchase prices often exceed appraised values. Most loan originators, agents and buyers believe that bridging the “appraisal gap” could cost tens of thousands of dollars of additional cash at closing. This is where an Up Front Mortgage Insurance Premium (UFMIP) can make a real difference. Using UFMIP to bridge the appraisal gap keeps the loan amount and payments the same for the buyer for a fraction of extra cash at closing.

UFMIP is a single-premium mortgage insurance where you pay mortgage insurance upfront in a lump sum rather than an additional fee added on to your monthly payment.

When a home is under contract, it will undergo a home appraisal. An appraisal ensures that the property’s market value lines up with its list price and that the mortgage amount the buyer is seeking is within an acceptable range. Lenders will generally approve a loan-to-value (LTV) of 80% or less, but this is not a hard and fast rule. When the home is appraised lower than the list price, the LTV increases. If the appraiser determines the home is worth less than the purchase price, there will be a price difference that needs to be paid. This difference could put the sale in jeopardy.

If your buyer is planning on putting 20% down but is afraid of needing additional money if the appraisal comes in low, they have the option to leave their loan and their down payment exactly the same. How is that possible? Let’s consider one example. Your buyer is putting 20% down on a home that accepted the offer of $900,000. The appraisal came in at $850,000. Many people think that’s the end of the story. That the buyer needs to come with $50,000 more to closing. That’s why listing agents want to see proof of funds. What they are not thinking about is the option to shift the loan to value (LTV) on the loan program to keep everything just as it is using an Up Front Mortgage Insurance Premium.

Tim O'Leary
VP of Mortgage Lending
O: (808) 460-7974 - C: (808) 227-1199
1001 Bishop Street Suites 1000 & 1001, Honolulu, HI 96813

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