3 Tips to Combat a Low Appraisal
After all the time you spent finding the ideal home, negotiating back and forth with the seller on the price and terms, both you and the seller may be stunned when the appraisal comes in below the purchase agreement's price. While low appraisals aren’t as common as they were as we rose from the ashes of a crashed-and-burned housing market, they do happen. Take a deep breath and dive into the following tips to salvage the purchase of your home. 1. Lower the Price The quickest and easiest way to make sure that the sale goes through is to renegotiate the purchase agreement with a lower sales price to reflect the appraisal value. If there are incentives included in the sales price (appliances, furniture, etc.) perhaps you can take the sting out of a lower sales price by removing these from inclusion in the sale. This way, both you and the seller compromise. 2. Increase the Down Payment If you truly love the home, and the seller refuses to lower the price, consider paying the difference between the purchase price and what the bank will lend. Increasing the down payment will bring the sales price in line with the appraised value. There is a danger in this though. Paying more up front will create negative equity in the home (the amount of the loan plus the larger down payment is greater than the appraised value of the property) and the loan may not be approved. 3. Challenge the Appraisal: Sellers may be able to help the cause, particularly if they have inside information on a recent sale in their neighborhood, such as a death or divorce, something that would explain lower-than-normal sales price. Also, if there are pending sales in the area, and the seller or either agent happen to be privy to what the final sales price is, that could be go a long way in helping the appraiser to reconsider. Remember, the appraiser most likely doesn’t live in the neighborhood; he or she may not know the area very well and will most likely welcome your “insider” input. A low appraisal doesn't have to be a deal killer. Before you decide to walk away, be sure you've done all you can to remedy the problem and get the sale back on track.
First Time Homebuyer Steps to Success (Step 3)
Unless you'll be paying cash for a home or you are applying for a loan backed by the government (such as a USDA or VA loan) or a Fannie Mae or Freddie Mac loan, you'll need at least 20 percent of the loan amount in cash. This is the down payment, required by the lender. The larger the down payment, the more attractive the interest rate will be. The down payment may also determine whether or not you'll be required to purchase private mortgage insurance (PMI). You’ll also need cash for closing costs, which can add up to a significant amount of money by the time we get to closing. Some fees are negotiable and the total amount due varies. I counsel my clients to save at least 3 to 4 percent of the loan amount, just to be safe. If you’re not a saver ― and millions of Americans aren’t ― it’s time to get into the habit. Not only will you need savings for the cash layouts of buying a home, but for its ongoing maintenance as well. Set up a Budget Setting up a budget is challenging but sticking to it is worse. If you have personal finance software with budget-making tools, creating the budget will be a snap. Financial guru Dave Ramsey EveryDollar® Budget Tool online and its free. Otherwise, use a spreadsheet. The first step is to know exactly how much money you bring in every month. You’ll then need to list your fixed expenses – those that remain the same every month. Examples of these expenses include your car payment, insurance and rent or fixed mortgage payment. Variable expenses, such as what you pay for electricity, groceries and your phone, come next. Keep track of your spending every day and enter the numbers into the budget on a weekly basis. This budget is a snapshot of where you are spending your money, where money is being wasted and whether you are spending more than you can afford. With this knowledge you can direct your resources so that you keep up with bill payments and start saving money toward the goal of purchasing a home. Make Lifestyle Changes After a few months of budgeting you’ll find areas where you can cut back. Some of these might include taking the bus to work instead of driving, bringing your lunch from home instead of eating out, shopping at discount stores and using coupons. Everywhere you can make cuts in the budget allows you to put more money toward paying down debt and saving money, thus putting you one step closer to solvency and the purchase of your new home. Save Money When your debts are paid off you can use the money that you had been using to pay them down to start building a savings account for those cash layouts involved in the home purchase. As you build your savings, avoid the urge to add to your debt. Keep that house you want top-of-mind to motivate yourself to stay out of debt and remain solvent. Congratulations on taking the initial steps toward ensuring you receive the most amount of money, at the lowest price, from a lender.
First Time Homebuyer Steps to Success (Step 2)
Last time we looked how lenders determine your rate and your credit worthiness based on your credit score. We suggested that you order your credit reports from the “big 3” credit reporting agencies. When you receive your credit reports look for mistakes or anything else you can challenge. According to a CBS News report, about one out of every five credit reports contain errors. The study also found that one out of 10 of these errors are serious enough to diminish the consumer’s chances of obtaining credit. Common errors found in credit reports include: Other people’s accounts listed as the consumer’s. Incorrect personal information, such as birth date and social security number. Closed accounts listed as open, with outstanding debt. Accounts in good standing aren’t listed in the report. Dispute anything in your report that appears to be a mistake. The credit reporting agencies, by law, must investigate your dispute and correct inaccurate information within 30 days. Your FICO® Score Thankfully, your credit score isn’t etched in stone but rises and falls according to how you use credit. There are several ways to boost your FICO®. Start by paying off accounts that you’ve fallen behind on. Late pays count heavily against mortgage borrowers. Here are a few other ways to help clean up your credit history: Pay down other debts, starting with the one with the highest balance. Pay down credit card balances that are at the credit maximum and keep the balances low. Don’t close old credit accounts – they’re good for your score. If you don’t have a credit card, apply for one, use the credit sparingly and pay the balance every month. Applying for the card will lower your score but if you use the card responsibly, your score will rise. Although these tasks may seem time consuming, if they raise your credit score a few points, it will be worth it when you go to apply for a mortgage. Even after a bankruptcy, "it's not uncommon for people to see their credit scores skyrocket up into the 700s if they have absolutely no late payments or collections,” says Chris Bridges, former credit and identity theft consultant with Vision Credit Services in Washington, D.C. Please join us next time for Step 3 in the home-buying process.
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