Money matters

MONEY MATTERS

By Andre Persaud Mortgage Agent, Lic. #M14000772

In the last couple of weeks I have seen a couple appraisals come in light, so I Ithought this would be a useful ‘Tip’ for you in this shifting market.

I don’t want this to alarm anyone as this is still a rare thing to happen. In the last 6 months our team has processed over 100 mortgages, and I have only had 3 appraisals come in light, but two of them were in the past two weeks.

In this time period where the market seems to be shifting a bit, I’m getting a lot of questions about what happens if an appraisal comes in low.

WHAT HAPPENS IF THE APPRAISAL COMES IN LOW?

When an appraisal comes in low, the client must cover the difference between the appraised value and the purchase price.

FOR EXAMPLE:

Client buys a property for $600,000, and the appraisal comes in at $560,000. Client would have to pay $40,000 to cover the difference and make a down payment of at least $31,000 on the $560,000. So they would need to have $71,000 ($40,000 + $31,000)

When to be concerned about an appraisal coming in low. This usually only ever comes up in multiple offer scenarios, but it is still rare even then.

There are 2 scenarios when the appraisal coming in light can have a drastic affect on the mortgage approval. When putting exactly 5% down, or putting exactly 20% down. Here’s why.

1. Putting 5% down (or the minimum down payment under the new guidelines).

EXAMPLE:

If a client is buying a property for $500,000 and only has $25,000 to put down and no way of getting any more money, there is cause for concern because they cannot put less than 5% down.

Purchase Price: $500,000

Appraised Value: $480,000

Why is this a concern?

The client would have to use $20,000 to cover the difference between the appraised value and the purchase price, and would need to put at least 5% down on the $480,000. After spending $20k to cover the difference, they would not have enough money left to cover the 5% x $480k = $24,000. The client would need to have $44,000 ($20,000 + $24,000) in this scenario.

2. Putting 20% down.

EXAMPLE:

Purchase: $500,000

Down: $100,000

Appraised Value: $480,000

This can be cause for concern because when putting 20% or more down, we use different guidelines to qualify a client. When putting 20% down it becomes easier to qualify for more because we can go up to a 30 year amortization and we do not need to involve CMHC or one of the other insurers. If we drop to even 19% down, we are restricted to a 25 year amortization and we must get approval from the insurer as well as the lender.

The client would have to use $20,000 to cover the difference, leaving them with $80,000. This would mean that they are only putting down $80,000 on the appraised value of $480k. So 16% down.

Why is this a concern?

The client may have qualified for this amount because we were using a 30 year amortization. Now that we have to use a 25 year amortization and add in an insurance premium, does the client still qualify?

What I sometimes do to combat this is run the initial application with 10% or 15% down. However, I will not automatically do this unless advised by the client, that they have concerns surrounding the appraisal. PLEASE tell me before making your offer. It is a lot more work at the pre approval stage, but I don’t mind as it saves us the stress later on.

LAST EXAMPLE:

Purchase: $500,000

Down (30%): $150,000

Appraised Value: $480,000

You just have to think, if the appraisal comes in low, can the client simply drop their % of down payment and not cross from above the 20% or 5% mark, to below those marks.

3. When NOT to be concerned: Putting 30% down. There is no cause for concern here as the client has more than enough to cover the $20,000 difference, and they are still left with $130,000 of cash in hand. They would be putting down 26% of the $480,000 appraised value so they would leave their original approval as is with the

30 year amortization and no CMHC premium.

I hope I did not make this too confusing. I think I’m better at communicating this in person or over the phone. Please feel free to call me to go over specific deals.

Andre Persaud SAFEBRIDGE Financial Group Broker License #10524 P: 416-559-8856 F: 1-416-850-5352