When a Home's Sale Price Is Higher than Market Value
But the house prices many enjoyed back then are becoming less viable as the housing market recovers from all that. A common problem is likely coming back into view for various loan applicants navigating the recovering market.
When the House Price Is Higher than the Actual Value
An FHA appraisal, VA appraisal, or conventional mortgage appraisal all work toward the same end. No matter the nature of the loan itself, the appraisal is meant to establish the current fair market value of the home compared to others like it in the area.
But the home's current market value might not be the same as the asking price. What does it mean if you are offered a price on a home that turns out to be lower than the appraised value?
Property Values Inform FHA Purchase Loans, Refinance Loans
A home’s market value won’t always match the value it had when it was initially built. It may increase or decrease thanks to various factors, including how well the owners took care of the property over the years, how much inventory is in a given housing market, and other variables.
If the home you want to buy has a lower value than the asking price, it may indicate that it is not in great condition. It may indicate that demand for that type of housing is lower, or it may indicate that the home is located in a problem area, such as those prone to mudslides, hurricanes, etc.
A home that costs more than the market value of the property may not have as much “remaining economic life” left in it as-is, which is another reason to be careful about buying a home that appraises low.
Not all homes that appraise lower than the asking price are problem homes, but it’s enough of a concern that you should ask why the appraisal came in low before deciding what to do about it.
You Don't Have to Close the Deal
Most government-backed mortgages, including FHA loans, have an escape clause which frees the borrower to walk away from the deal with no financial penalty if the home appraises lower than the asking price.
Where conventional loans are concerned, you may have to formally request a contingency clause be inserted into your offer stating that your agreement to buy the home depends on whether the asking price is the same or better than the appraised value. The FHA Loan program does not allow sellers or lenders to force you to close the deal when the asking price exceeds the market value. You can choose to buy the house anyway but know that you cannot finance the difference between the asking price and the appraised value of the property.
Measuring Your Loan-to-Value Ratio
Using an FHA Loan Calculator
Principal Payments and Your FHA Loan
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