Understanding how appraised value and loan-to-value (LTV) work

Two years later, and we are still having conversations with clients about their offer and the potential for the home not to appraise at the purchase price. It can be a difficult conversation for agents as buyers assume it means they have to cover the difference out-of-pocket, but that may not actually be the case with an appraisal gap waiver — let’s talk about why.

When a borrower applies for a mortgage, the lender will do a calculation of downpayment percentage based on either the sales price or the appraised value — whichever is less.

Unless your borrower is putting the minimum amount down allowed, the lender has the ability to keep the loan amount the SAME if the home does not appraise at purchase price. This means the borrower’s cash needed to close does not change. 

The monthly payment amount or interest rate may still be impacted — but all of that can be demonstrated to a buyer beforehand so that they can weigh their options.

Here is a quick example:*

• Purchase Price: $400,000
• Appraised Value $385,000
• 20% downpayment: $80,000
• 20% down loan amount $320,000

The buyer in this scenario could keep the loan amount at $320,000, have 13% downpayment with no additional funds needed to close and a slight increase to monthly payment.

The buyer always has the ability to make up the difference in cash, but by adjusting the loan-to-value ratio, it allows the buyer to purchase the home without any additional cash needed. This could be a game-changer for you when advising your client on potential options in a competitive market.

At Key Mortgage, our job is to make you look good to your client, and being a creative financing partner to you and your buyers is just one way we can be a valuable part of your business.

Want more information on how to present this to your buyers? Reply to this email and we will get you connected with one of our loan officers today.

*These scenarios are examples created for illustrative purposes. Posted rates and loan amounts do not constitute an offer to lend. All loans are subject to credit approval. Interest rates are subject to change due to market conditions. Please contact your loan originator for current rates. Key Mortgage Services Inc., NMLS# 155748, 425 N Martingale Rd, #1710, Schaumburg, IL 60173. For licensing information, go to: www.nmlsconsumeraccess.org/