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Overcoming a Low Appraisal

The appraised value of the property (see Chapter 2, “Qualifying for a Mortgage Loan”) is the one item over which you have the least control. However, you can affect or use to your advantage some things to compensate for weakness in another area.

Appraised Value Is Less Than the Purchase Price

Lenders use the lesser of the sales price or appraised value to determine the LTV ratio. If you are attempting to get maximum financing or are just trying to avoid buying mortgage insurance, a low appraisal can be disastrous. If you are making a substantial enough down payment on the property so you are unaffected by the appraised value, then it may not matter what the appraised value is, as long as you feel that the price fairly reflects the value that you perceive.

If you believe that the value is more accurately reflected in the sales price, you can appeal for a reappraisal of the property's value. To support the appeal, have your real estate agent provide data for comparable properties sold in the area within the previous six months.

• Consider the prices of the properties that are geographically closest to yours (much of a home's features can be changed, but relocating the house generally is not feasible).

• Consider houses that have similar lot sizes and square footage, the same number of bedrooms, similar floor plans, and amenities (such as remodeled kitchens, appliances, swimming pools, decks, balconies, landscaping, and particularly striking views).

• Consider the trend of prices; can you demonstrate that prices of similar homes have been increasing? If so, provide information, including newspaper clippings, information from the agent's database and (although weighted much less heavily) asking prices for homes currently on the market. Consider the sales cycle; are comparable homes being snapped up as soon as they come on the market, or do they take months to sell?

If you make a convincing argument, the appraiser may relent and give you a higher value. Be aw are, however, that you are questioning the judgment of a professional, so be sure to have convincing information in hand before beginning this discussion. You might be allow ed by your lender to get a second appraisal, but it too might come in low.

If you believe that the first appraisal is correct, that perhaps the value is less than the sales price, you might negotiate with the seller to obtain a lower sales price.

If the appraised value is greater than the purchase price, it does not affect the lender's valuation of the property for determining LTV ratio because the sales price then becomes the determining factor. If your loan application is weak in another area, however, it would be helpful to highlight the compensating factor that the property is of a greater value. Every positive feature that you can document about the transaction increases your chances of getting the mortgage.

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