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As I understand:

The purpose of a down payment is to minimize risk to the lender. For a traditional mortgage, lenders are willing to lend up to 80% of the value of the house.

The appraisal determines the value of the house for this purpose.

Therefore:

If the appraisal is lower than the sale price, the lender is willing to lend less, and my down payment is higher -- assuming I still wanted the house, and the seller didn't make an adjustment. If the appraisal was 5k lower, the minimum down payment would be 4k more.

And the reverse:

If the appraisal is higher than the sale price, the lender is willing to lend more, and my down payment is lower. If the appraisal was 5k higher, the minimum down payment is 4k less.

Is my understanding correct? Is this the purpose of a down payment, and its relationship to the appraisal?

Paul Draper
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1 Answers1

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No your assumption is incorrect. Its kind of like a "whichever is lower" kind of answer. A lender will loan 80% on the appraised value or sales price whichever is lower. Although in most cases they match up as the same number but if they don't they will take the lower number and loan on that.

However, if the appraisal was 5k lower I would go back and negotiate with the seller to reduce the price by 5k. They are in a position of weakness because if they don't sell to you then they still more than likely wont sell for more than the appraised value unless its in a hot market where they could get a cash buyer.

Good luck! Make smart choices!

SupremeA
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