Buyers try to put 20% down on their mortgage so they can avoid PMI – Private Mortgage Insurance.
Sometimes it is hard to do because as interest rates start to rise, buyers are eager to buy now rather than wait to save more money. Rents are increasing so that slows down amount some buyers can save each month. I am also seeing situations where buyers are paying over asking price but some appraisals are coming in low (below asking price) because the market is so hot right now.
Appraisal comes in lower than the contract price.
In these situations where the appraisal comes in lower than the contract price, the mortgage company bases the calculation of the percentage (also referred to as loan-to-value) on the purchase price or appraised value, whichever is lower.
Buying a home with less than 20% down.
While it is a great plan to put 20% down, there are options to buy a home with less than 20% down so it does not make sense for a buyer to walk away from a contract and lose the deposit, inspection fees, and appraisal costs just to start the buying process over again. In this market where listings sell fast and it is hard to find a home in that perfect neighborhood that meets a buyer’s criteria, starting over is costly both in time and money.
A buyer can increase the amount of money they bring to closing to make up the difference between the purchase price and appraised value so they still have 20% down.
A buyer can also pay MI (also known as mortgage insurance) until they make enough payments to reach 20% loan to value. This is often a good solution because the buyer can keep the extra cash they have to use towards moving expenses, repairs, upgrades or new furniture/appliances. Some mortgages require a buyer to pay MI for at least the first year, so ask your lender to clarify. A buyer can pay a little extra each month or wait until receiving a tax refund or bonus check from work to make a principal only payment to reach the amount where MI will no longer be required.
Do you have questions about which option is right for you? Contact Amy Shair.