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I plan to put down 20% on the purchase price of a home, but the appraisal values the home 10% below the agreed price. Can the bank ask for additional down payment to get to 80/20 loan to value?

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    Were you trying to outbid other potential buyers, or was your offer misinformed? I would start with trying to renegotiate the purchase price with the seller before getting the final mortgage. Your original intended downpayment would then be more than sufficient to get to 80% LTV. – chepner Jun 22 '20 at 13:14
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    Collateral value for LTV purposes is the lesser of the appraisal amount and the purchase price. If appraisal is less than purchase your LTV and down payment are driven off this lesser value. Please think this deal through if the appraisal came back a full 10% low, though. – C8H10N4O2 Jun 22 '20 at 15:51
  • Yes, if you can't renegotiate then you will have to put more down or the bank won't lend the money if they require 20%. – AbraCadaver Jun 22 '20 at 22:36
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    Chepner's comment about why you're paying more than the house is valued at is obviously a good question to think through. Fundamentally though, the bank doesn't care. As far as they are concerned, you're not buying a 100k house. You're buying a 90k house and giving the seller 10k out of the goodness of your heart. They're in the business of providing mortgages for houses, but random acts of beneficence not so much. So they're basically saying "Here's a mortgage deal for a 90k house. 72k from us. 18k from you. If you feel like giving the seller a tip, you do that on your dime." – Josiah Jun 22 '20 at 22:39
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    All the answers assume that the appraisal is correct and that you are overpaying for the house. Another possibility is that the appraisal is incorrect and the sale price is the proper value. A careful review of the appraisal is indicated. It may be hard to convince the bank that the appraisal is wrong. Evidence (which may not be available) that others were willing to pay just about what you did may help. – Ross Millikan Jun 23 '20 at 3:09
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Yes they can. If you review your agreement with the bank thus far, you will almost certainly see clauses to that effect (if you have no mortgage approval/agreement yet, then of course they can ask for whatever they want).

The issue isn't exactly the 20% you're providing for the purchase, it's the 80% the bank is providing. The loan is backed by the house as collateral; if you fail to pay, they will sell (or force you to sell) the house to cover the debt. If the amount of the loan is very close to the value of the house, any fluctuation in value, and any associated costs of the process, can result in the bank not getting back their money. Generally lenders want the loan amount to be 80% of the house value or lower, or will require insurance (PMI) if it is higher.

Let's look at some example numbers. Assume you are paying $100k for the house, and you are putting 20% down ($20k) and borrowing the rest ($80k) from the bank. They are loaning you 80% of the purchase price. Now the appraisal comes saying the house is only worth $90k. You are still putting in at least 20% (20k is actually a little over 22% of 90k), but the bank is now lending you almost 90% of the value (80k is about 88.89% of 90k). If the value of the house goes down, they may not recover their investment in a foreclosure. It's reasonable that they would either ask you to provide additional funds to lower the loan-to-value ratio (LTV), or to pay for mortgage insurance (PMI) until you reach a safer LTV.

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    In summary, the bank still wants the balance of the amount they lent you. They worry that even if you sell the house, you will not have that balance. I feel like this could be stated succinctly between the first and second paragraphs. – Michael Jun 22 '20 at 21:34
  • The tl;dr version being, of course, "the bank is still doing 80%. The contract is just for more than 100% now." – Michael W. Jun 23 '20 at 18:15
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Of course they can. You are overpaying for this house by about 10% of the purchase price. By paying 10% over market value, you are turning your 20% down payment into a 10% one.

Is there a reason you are overpaying for this house? Is there a reason you are not attempting to renegotiate? There may be very good reasons, it just has to be very deliberate and coupled with the understanding it will cost you money in the long and short run beyond the extra 10%.

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    arithmetic does not add up. If OP was planning to pay 20% of X and appraisal came in at 0.9X, then the amount OP had set aside for downpayment is 22% of appraised value. The OP isn't entirely clear, but there is no way you get that paying 10% over value turns a 20% downpayment into a 10% downpayment. 18/20/22 +/-. – user4556274 Jun 22 '20 at 14:05
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    I was initially confused about the math as well. The problem isn't that the down payment is smaller (it is in fact a higher percentage of the appraiser value than the purchase price); the problem is that the loan amount is now more than 80% of the value. If putting 20k down for a 100k purchase, loan is 80k. If the value of the house is only 90k, the down payment is more than 20%, but the amount loaned is now closer to 90%. – yoozer8 Jun 22 '20 at 14:43
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    you are turning your 20% down payment into a 10% one is not accurate. You are still putting down 20% of the purchase price, and putting down more than 20% of the appraised value. It's the borrowed money that is the issue; it is changing from 80% to almost 90% – yoozer8 Jun 22 '20 at 14:46
  • Precisely, your down payment needs to be at least 20% LTV (Loan To Value), it has absolutely nothing to do with your purchase price. – Glen Yates Jun 22 '20 at 22:46
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    @user4556274 The downpayment is the fraction of the appraised value of the house paid for by the buyer and not borrowed out of the total appraised value of the house. Say the sale price is X, the loan amount is 0.8X and the downpayment is 0.2X. If the appraised value is 0.9X, then the downpayment is appraised value minus borrowed value out of appraised value, or (0.9X-0.8x) out of 0.9X or 11%. – David Schwartz Jun 22 '20 at 23:10
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Re-frame the question in your mind.

You made an offer in good faith to purchase the home.

Then you paid a professional to appraise the value of the home. In most if not every case it is you not the bank who paid the appraiser. If even the bank gave them the money, it is your money they gave the appraiser.

The appraisal came in lower then expected. Presumably you also paid for a home inspection. If that home inspection found things that were broken, you and the seller negotiated fixing those issues. The same applies here, a professional you hired says the value of the home is not what you expected.

Now you renegotiate the purchase price. Your offer on the house should have included a line that says "subject to financing" clearly your financing is at risk.

You have the option of, not purchasing the home, because of the value difference. You should get your earnest money back if the deal does not close because of the value difference. You would be out money spent for the appraisal and the home inspection but, that is why you paid them.

In most cases, you and the seller will probably agree to a price lower then your current offer, but higher then the appraised value. You and the bank will work out what that means to your down payment. Your Realtor should be explaining all of these options to you.

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Yes, they are only willing to loan 80% of LTV.

LTV is Loan to Value. Value is what they can reliably count on someone paying for the house, and the appraisal is their best indicator of that.

In other words, if you have some emotional reason for paying more, they’re saying you need to pay that upfront.

You can’t hold a gun to their head and make them subsidize 80% of your emotional value.

If, the inspector and appraiser’s report is giving you buyer’s remorse, there is probably a clause in the sale agreement that allows you to exit over inability to get financing [at that price]. This would let you walk away, or in the alternate pushback for a better price.

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Probably not. But the lender can insist that you pay 20% of the appraised value of the house to reduce the percentage of the value of the house they have to loan you, and you aren't doing that.

You are getting a standard home mortgage. It helps you pay the value of the house and nothing else. You have to pay everything else. They help you pay for the value of the house by paying 80% of it, you pay the other 20% of it.

Remember, they are insisting on a 20% downpayment so that they only have to lend you 80% of the value of the house. This reduces their risk should they need to sell off the house because you can't make the payments.

So as far as the lender is concerned, your downpayment is the fraction of the value of the house that you are not borrowing. The fraction you are borrowing plus the fraction you are not borrowing must add to 100%. If the downpayment must be 20%, then the lender will not lend you more than 80% of the value of the house.

Say the sale price was $100,000. You originally expected your 20% downpayment to be $20,000. You were going to borrow $80,000.

Now, let's say the appraised price is $90,000. Let's calculate your downpayment fraction:

  1. You are borrowing $80,000.
  2. The value of the house is $90,000.
  3. Therefore the lender is lending 88.9% of the value of the house.
  4. Your downpayment (fraction of the house's value not borrowed) is therefore only 11.1% of the value of the house.

The lender doesn't care that you are paying a bunch of money to the seller to buy the house at more than its value. That doesn't help them in any way. They still won't lend you more than 80% of the value of the house.

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    Point 4 is wrong. The down payment is 20k/90k = 22.2% of the value of the house. The ratio that matters. however, is the amount of the loan (80k) to the value of the house (90k), which is now 89%; the bank wants that number to be 80% or less.Basically, 10k of your down payment is just going into the seller's pocket without buying any additional equity in the house. – chepner Jun 23 '20 at 0:29
  • No. The downpayment is the fraction of the house's value paid by the buyer. That the buyer also paid some extra money to the seller beyond the house's value has no effect on the downpayment. Read my answer again, it explains this. Paying for the privilege of buying the house above its market value is not paying for the house. – David Schwartz Jun 23 '20 at 0:31
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    The down payment is not the "fraction of the house's value not borrowed". It's money paid to the seller rather than borrowed from the bank. It's a fraction of the purchase price. – chepner Jun 23 '20 at 1:18
  • @chepner No. That is incorrect. See, for example the Investopedia page "Down Payment" which says, "For example, many homebuyers make down payments of 5% to 25% of the total value of the home." While, sure, in theory you could measure it as a percentage of anything you want, it is normally measured as a percentage of the total value of the home. And it only includes money that pays for the value of the house, not money paid to the seller for other purposes such as improvements or the privilege of buying. – David Schwartz Jun 23 '20 at 1:43
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    The fraction you are borrowing plus the fraction you are not borrowing must add to 100%. 100% of what is the core of the issue. In order to execute the purchase, they must add to 100% of the purchase price (otherwise you are not giving the seller enough money and they won't give you the house). The bank's 80% concern (which leads to the 20% guideline/rule) relates to the home value. – yoozer8 Jun 23 '20 at 13:45

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