Appraisal Amount Vs. Mortgage Loan Amount
An appraisal directly affects the amount of your mortgage loan that you can qualify for. This is because your lender gives you a home loan based on collateral, which is the value of your future home. In other words, it’s your home appraisal’s estimate of the home’s fair market value. It keeps the lender from lending you too much money and keeps you from borrowing more than the value of your home.
- Appraisal amount: This is an estimate (calculated by an appraiser) of how much your home is worth and reveals how much a lender can let you borrow for a home loan.
- Mortgage loan amount: This is the amount a lender will allow a borrower to take out in order to buy property.
If A House Is Appraised Lower Than The Purchase Price
What happens if the appraisal comes in below the purchase price of the home you want to buy? Though it might be an unexpected scenario, it’s best to be prepared.
A low appraisal doesn’t mean that a lender won’t lend you money. It means that your lender will give you a loan based on the loan-to-value ratio (LTV) agreed to in the proposed contract. The LTV compares the size of the loan you’re getting with the value of the home.
For a home priced at $150,000, what happens when the appraised value comes back at only $100,000? Since your agreed-upon price is $150,000, and your lender won’t lend more than the appraised value, you’ll have to make up the difference or work with the seller to see if they can reduce the asking price to the appraised value.
How LTV Works When The Appraisal Matches The Home Price
Let’s take a look at a quick example of how LTV works when the appraisal comes back right on target with the home price.
The home you’d like to buy is appraised at $150,000. You and the seller agree that you’ll buy the home for $150,000. In addition, you tell your mortgage lender that you’re making a down payment of $20,000.
Here’s how to calculate your LTV:
- Subtract your down payment ($20,000) from the total selling price ($150,000) to get $130,000. This is the amount you plan to borrow.
- Next, divide your loan amount ($130,000) by the value of the property ($150,000) to get 0.866.
- Multiply that result by 100 to get your LTV. In this case, the LTV is 87%.
If A House Is Appraised Higher Than The Purchase Price
What happens if the appraisal comes in above the purchase price of the home? You’re in a good situation if this happens. It simply means that you’ve agreed to pay the seller less than the home’s market value. Your mortgage amount doesn’t change because the selling price won’t increase to meet the appraisal value.
