Appraisal Waiver… What is it, and how to use it

March 13, 2023

Appraisal Waiver… What is it, and how to use it.

Over the last few years, terms have been introduced and re-introduced due to the in-balance of supply and demand in the residential real estate market. An “appraisal waiver” is one such term.

Before I explain the waiver, here is a quick look at the appraisal.

When obtaining a mortgage for a property, the bank will have the property appraised by an independent licensed appraiser to determine the ultimate value of the property. The basic premise is that if you have agreed to pay $500,000 for a home and obtain a mortgage for a portion of the $500,000. Let’s say you are putting 20% down ($100,000). The bank is willing to give you a mortgage for 80%LTV(loan to value), commonly referred to as 80/20. Providing the independent appraiser values the property for at least $500,000, then all is well.

Let’s say the property appraisal comes in at $490,000… The $400,000 mortgage the bank is willing to lend you is no longer 80%LTV; it is now 82%, so you would no longer be in an 80/20 scenario which will change qualification requirements as well as possible out-of-pocket expenses. The three most common remedies for under-appraisal are as follows:

• Try to negotiate with the seller to lower the purchase price.
• Add an extra $10,000 to your down payment, lowering the mortgage amount to $390,000, bringing you back to an 80/20 position.
• Move forward with a lesser down payment which will keep you from coming up with extra money for the deal but will cost you in interest rate as well as create a need for private mortgage insurance.

In the competitive environment we have been in over the last two or so years, the term: “buyer waives appraisal” has been used, and while it sounds powerful, it doesn’t mean anything unless the buyer has the funds to complete a cash purchase.

The effective use of the concept is: “Purchaser will cover any potential appraisal shortfall up to a specific dollar amount (Let’s call it $20,000) and shows proof of funds to complete a purchase.”

Based upon the above example, you, as the buyer, are saying: “as long as the property appraises for $480,000, we will complete the transaction at the agreed-upon price of $500,000.” The only way to accomplish this is to have the extra $20,000, or your bank has approved you for a higher LTV.

This method is excellent for when the purchase price exceeds the seller’s asking price.

-Kevin Murphy

This blog is for informational purposes and should not be considered as a specific recommendation.