Do Mortgage Lenders Recognize Bargain Prices?

October 9, 2000, Revised January 28, 2011

"I am buying a house for $105,000 but it is appraised at $120,000. Can I use the difference as my down payment?"

"I have no cash and lots of credit card debt, but I think I can purchase a house for less than its appraised value. Can I use the difference to cover my credit card debt?"

No in both cases. The difference between the appraised value and sale price cannot be applied to the down payment. And it cannot be used to cover other debts by increasing the loan amount.

Lenders don’t recognize ‘bargain" prices when they set down payment requirements. Required down payments are based on the lower of sale price or appraised value. Hence, buying at a price below appraised value does not affect the amount you must put down.

Suppose the required down payment is 10%, the house is appraised at $110,000, but the sale price is $100,000. Then the required down payment is $10,000 and the maximum loan is $90,000, based on the sale price. The lender disregards the higher appraisal.

This rule is not unreasonable. Lenders set down payment requirements to protect themselves against loss in the event the borrower defaults and the lender must take the property and resell it. If the first seller could only get $100,000 for the house, the lender would be foolish to assume that he could get more. Appraising is not an exact science.

"A home is listed at $69,900 but the seller is willing to drop the price by 10%. Can I have the 10% applied to my down payment?"

No. If lenders are unwilling to accept an appraiser’s valuation when it exceeds the sale price, the ask price of home sellers has even less credibility.

Before the financial crisis, some lenders offered mortgage programs that allowed loan amounts up to 125% of the lesser of appraised value or sale price. Such programs were based on the presumption that the house involved would appreciate in value over time. Buyers could use such programs to cover the purchase of home accessories, and sometimes to consolidate debts. The financial crisis and associated decline in home prices ended these programs.

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