Ok. That is kind of a silly title, but you have to admit it’s fun to say!
It’s not so fun to have to experience it when buying a home, unless, of course, you’re one of the many gappers buying up properties right now. (Gappers is another word for people paying the difference between the appraised value and their offer amount. Some are just paying all cash.)
I have a couple clients who are first-time homebuyers. They are house hunting with a nice little FHA first-time homebuyer loan, possibly with a little down payment assistance. They start out feeling pretty darn spiffy, being qualified to make such a major life decision and purchase. Then, as it seems to be for most of these buyers, the reality of the current market smacks them up side their heads. There are cash-heavy investors, ready to pay more than the listing price for these properties!
“Well, why don’t WE do that too? Can’t we play that game?” they ask.
Yeah! Let’s do that! Got say $40,000 extra that you’re not planning on using for your down payment and/or closing costs?
“Huh? Wouldn’t our loan cover the accepted offer?”
Not quite! We don’t get to set the value for the property the bank is financing. You’re basically shopping for an investment for your bank. That’s how they have to view it. If you default, that property will be theirs, as well as the risk of shortfall, if they have to foreclose.
The banks require appraisers to use at least 3 properties within a mile radius, the smaller the radius, the better. Those properties have to be as similar as possible, in square footage, rooms, lot size, and neighborhood desirability (to name just a few). If her appraisal says your property of choice is worth $250,000 and your offer was for $290,000, you would need to come up with another $40,000 to make up the difference, and THEN pay your down payment and closing costs on top of that! See example:
$275,000 Listing Price
$290,000 your offer - 250,000 appraised value $ 40,000 difference
$250,000 appraised value is what your loan will be based on
- 241,250 loan amount with a 96.5% FHA loan $ 8,750 3.5% down payment
Already we’re up to $48,750, and we haven’t even added in closing costs. I won’t go into that, because the scenarios are very dependent on the terms in your purchase contract.
In a nutshell, your loan is based on the appraised value, not your offered price. I know you want to compete, but short of having working capital, your best weapon is persistence and determination. Don’t give up!
Written By Guest Blogger Michelle Hamilton
Author:Sean Safholm BRE#01270334 Phone: 916-920-7000 Dated: March 26th 2014 Views: 557 About Sean: Sean Safholm started his career in real estate in 1999 when he was going to college to study real es...
Sean Safholm is a licensed Real Estate Broker in California. He is a real estate investor, broker, and seasoned mortgage pro. Sean has closed over 2000 transactions on the mortgage side of the business and a few dozen house deals for his own account. He has extensive knowledge on all sides of the real estate transaction and is here to assist first time buyers, move up buyers and investors with all their real estate needs.
The news came out a while back that Freddie Mac was suspending its new
"My husband and I were looking to buy a home and needed direction. We needed help finding the best area that was going to fit our family needs as well as finding a great loan that would fit our needs. We contacted Sean Safholm who was wonderful in taking care of us and helped us find the area that worked best for my family. He directed us to a new home subdivision that had the perfect house and met all the needs of my family.
He always answered all of our questions and picked up his phone every time we called. Even though he was not our real estate broker, Sean helped us with our financing to purchase our home. We feel we got the best deal in town with our mortgage. I priced/shopped rates with a few lenders and by far Sean Safholm beat them not only in price and payment, but also in customer service! I continue to recommend Sean Safholm to all of my family and friends.