How to help borrowers overcome a low appraisal

Challenges facing homebuyers

The most obvious challenge facing those looking to buy is, of course, actually finding a home to buy! Nationally the number of listings dropped considerably over the course of a year. Realtor.com estimated that as of May 2021, active listings were down 51% over the same period last year.

This low inventory creates a ripple effect of challenges. With low supply and high demand, prices rise: the market has seen a 15% increase in median list price year-over-year as of May, again according to Realtor.com. And that’s just the list price!

To compete in such a market, those hoping to buy a home often submit offers that exceed the asking or list price to make their offer more attractive. In fact, according to a recent Redfin report, 48% of homes sold above their asking price — 20% higher than the same time last year.

While this over-asking-price strategy may help the potential homebuyer win the bid, it may also create an unanticipated challenge, one that may either cost them a lot more money at closing or perhaps threaten the deal itself. Yes, I’m talking about the dreaded low appraisal.

Overcoming the low appraisal

It’s an all-too-common scenario, so chances are you’ve heard it play out many times. Heck, chances are it has happened to one of your customers or real estate agent referral partners: the appraisal comes in lower than the accepted offer, leaving borrowers to make up the difference.

However, you can show your borrowers and referral partners how you can not only help save the deal but avoid significant additional out-of-pocket costs – with little to no change in the monthly mortgage payment. And the irony is, that the solution to avoiding those additional expenses is the very thing too many borrowers try to avoid — private mortgage insurance (MI).

Let’s look at an example

After years of saving or building equity, and months of racing to new listings and bidding against others, our homebuyers, Jill and John, have found their home AND had an offer accepted! Yes, they had to “overbid” by offering $400,000 on a home that was listed at $380,000 but, hey, that’s what it takes in this market, right?

They believe the smart choice is to put down 20%, or $80,000 in this scenario, to avoid paying MI. Unfortunately, the home doesn’t appraise at $400,000; instead, the appraisal comes in at the original asking price of $380,000.

So now what? Jill and John could walk away from the deal or see if the sellers will renegotiate – perhaps unlikely in this market. Or they may be inclined to pay the extra $16,000 to maintain a 20% loan-to-value if they have the financial resources to do so.

Use private mortgage insurance to avoid losing the deal or paying more out of pocket!

Another option would be to simply accept a higher loan-to-value (LTV). Yes, doing that would require Jill and John to rely on private MI – but that makes all the difference. Consider the benefits of using private MI in this scenario:

Closing costs may be comparable depending on the MI program
The monthly mortgage payment will be similar to what they expected to pay when they first had their offer accepted
They’ll receive a .25% decrease in the loan-level price adjustment (LLPA) or credit fee charged by Fannie Mae or Freddie Mac by moving from 80% LTV to 85% LTV*