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Goal: avoid overpaying for a house.

Scenario:

  • $200k house
  • 800+ credit score
  • Conventional 30 year loan at market rate
  • Conventional loan requires 5% down minimum
  • I can comfortably afford 20% down
  • Loan freely allows for principal pre-payment
  • Loan recasting costs money; I am not interested in this

When buying a house you pay the bank to send an appraiser to ensure there is worthy collateral for the loan.

If you are offering 20% ($40k) down then does the bank simply approve the loan if the house is appraised at $160k?

I ask because it would seem wiser to only shoot for 5% ($10k) down so that the bank is looking for enough value to justify the price. In turn this would help you achieve a fair price.

To avoid PMI I would just make a lump payment for the other $30k once the sale is final.

Central NY.

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    Sorry, I don't quite understand the question. Your premise seems to be that you think if you are only borrowing $160k, the assessor is biased toward valuing your house at $160k, and if you borrow more, the assessor might be biased toward valuing the house higher. Have I summarized your premise correctly? If so, how does it help you if the assessor values the house higher than $160k?
    – Ben Miller
    Jul 12, 2021 at 16:19
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    If the appraisal comes back as $160k, you have a strong argument that this is not a $200k house. You adjust your offer accordingly, and the seller can decide if they believe your appraiser or not.
    – chepner
    Jul 12, 2021 at 16:46
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    The real estate appraiser probably will be an independent contractor, not an employee of the bank or mortgage company, and will have no idea of the terms of the loan you're asking for. Indeed, I would think knowing might be considered unethical, since the appraiser is supposed to be a neutral party. (Language nitpick: an assessor is generally a county employee valuing the property for tax purposes.)
    – jamesqf
    Jul 12, 2021 at 17:00
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    PMI is based on the loan-to-value ratio. The actual selling price is irrelevant.
    – chepner
    Jul 12, 2021 at 17:55
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    (Or rather, the selling price minus the down payment determines the loan size. With no downpayment, your LTV would be greater than 100%, which suggest you won't even get a mortgage. With a downpayment of $10k, your LTV would be 100%, assuming you get the loan. With a bigger downpayment, you can get your LTV down to 80%, which is typically when PMI is not required.)
    – chepner
    Jul 12, 2021 at 18:05

3 Answers 3

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If you are offering 20% ($40k) down then does the bank/assessor only look for $160k value in the house?

The appraiser is tasked with determining the current value of a property, your down payment amount is not a factor in their process.

The appraised value is important to lenders as there are maximum loan-to-value ratios (LTV) for each loan type, and at various thresholds LTV can impact interest rate and PMI requirement.

If a home doesn't appraise for enough, it could then push your planned LTV above the threshold your loan-type allows, in which case you'd need to either re-negotiate the offer price or come up with a higher down payment. Alternatively it could drive the LTV up above a planned threshold that would result in PMI or a higher interest rate.

For your example: If you wanted that 200k house at 20% (40k) down to avoid PMI but it appraised for 190k and the seller wouldn't budge on price then you'd need a 48k down payment to hit 80% LTV and avoid PMI.

Most non-cash offers include an appraisal contingency that allows the buyer to back out with no cost if the home does not appraise for at least the offer price. Typically sellers are fine with re-negotiating the sale price in these situations since most buyers will have the same appraisal contingency. The typical exception is in hot markets where cash offers are common.

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  • Both answers are good but I think this one explains it best. The loan is based on the appraised value of the house and PMI is based on LTV. If you want to pay more than the appraised value then those are funds that you have to come up with yourself.
    – MonkeyZeus
    Jul 12, 2021 at 18:41
  • I think the key point here is that the standard appraisal contingency requires an appraisal of at least the purchase price. The appraisal contingency is not phrased as meeting a certain LTV for mortgage approval. If it were the latter, then OP's concern would be valid (choosing a higher down payment would weaken the protection of the contingency).
    – nanoman
    Jul 12, 2021 at 21:23
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The assessor doesn't look for value, and the down payment does not (should not) have any impact on the assessor's evaluation. The assessor's job is to determine a reasonable assessment of what the house is actually worth. The bank is going to loan you a large amount of money, and the property is collateral for the loan. If you fail to repay the loan, the bank will force a sale of the house to collect what you owe; they want to make sure that such a sale will actually bring in enough money to cover what they are owed.

Where the down payment comes in is risk reduction. If the bank lends you 100% of the assessed value of the house, and you immediately stop paying the loan, they need to sell the house for more than it is worth to recoup their money (transaction costs, taxes, accrued interest on the debt all mean that after the sale, there won't be enough money left to cover what you owe the bank, and they still need to come after you for the rest). If the bank only loans you 80% of the value (you provide a 20% down payment), then it is more likely that a sale of the house would cover the outstanding balance, even if it sells for less than what was assessed.

Often, if your down payment is less than 20%, the bank will make you pay for an insurance policy that protects them from losing money if you default. This insurance (PMI) can be costly, and avoiding it is a significant factor in the common advice of putting down at least 20% for a mortgage.

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It's the loan-to-value ratio, not the loan-to-selling-price, that determines if you pay PMI.

For a house valued at $190k, let's assume you could get a mortgage with no down payment. The LTV would be 200/190, or roughly 105%. A $10k downpayment would get the LTV down to 100%.

To avoid PMI, you would need to reduce the LTV to 80%, so solving x/190 = 0.80 gives a loan amount of $152k. Thus, you would need a down payment of $48k, rather than your original estimate of $40k.

The appraiser's only job is to estimate the value of the house. They neither know nor care about what you are willing to pay for the house.

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