Today we are going to dive deeper into one of the options which is to cure the difference. If you choose to cure the difference, it means that you are accepting the appraised value and there is now a gap between the value of the home and the amount of funds the lender will lend to you.
The easiest way to handle this scenario is to bring the additional cash to the table. But what if you don’t have the additional funds?
We address this concern below with six Creative options on how to cure an appraisal gap without bringing additional cash to the table.
Remember that purchasing your dream home is a big investment and we always advise you perform your due diligence and speak with your professional legal advisors. You may find that some or none of these options may work for you. It is important to stress that you should always be cognizant of the long-term impacts that one of these decisions may cause.
Please note that while we consider this information reliable, it is not guaranteed. With that disclosure and disclaimer now on-record, let’s get into a few creative ideas. (Please note: these ideas were shared with me from Ryan Jahnke who is a mortgage broker in Colorado Springs. Thanks Ryan!) Now, let’s get started.
- Change your Loan to Value Ratio: Your solution could be as simple as changing the percentage down on your loan. For example, if you initially chose a loan that financed 70% and you brought 30% as a down payment, see if you qualify for a 20% down loan. This would give you an additional 10% to use towards the appraisal gap. Discuss this option with your lender to confirm that both you and the property qualifies for an alternate loan. Financing in a resort mountain community can have more restrictions than a primary market, so you may find that there are not as many loan options as you typically would have access to. This can be due to varying reasons such as how the property will be utilized. Meaning, is it a second-home or an investment property. Also, does it have restrictions around rentals or owner usage. These factors can impact the lending options that are readily available.
Heather’s Notes: Your lender can guide you through lending options. Your local realtor can help you and your lender navigate unique properties that may pose lending restrictions that your lender is unfamiliar with.
- Lender can Raise the Interest Rate. Many lenders will allow the client to increase the interest rate which can get the buyer several thousand dollars credit towards closing costs and prepaids.
Heather’s Notes: Be mindful of how this may impact the cost of your monthly payments and discuss with your lender what the long-term financial impact could be.
3. Ask Seller to Finance the Second Mortgage: Ask the seller to “be the bank” for the difference and receive payments. As a further incentive to the seller, make sure the terms are favorable, so they view it as a small investment. (For example, they could finance the loan at a higher interest rate and request that it is valid for a short period of time with a balloon payment of “x” years.) Their money is secured by a mortgage in second position on the house they are selling.
Heather’s Notes: Be mindful that the amount of the loan makes sense after any potential attorney’s fees. Be sure to agree on who pays what percentage of the legal costs to draft these documents.
4. Skeleton Policies & Use of Credit: For home purchases, closing costs need to be paid at closing and generally cannot be rolled into the loan. It’s possible to lower your immediate out-of-pocket costs by signing up for a lower cost insurance policy and pay for invoices on a credit card. For example, you could begin with a lower-priced homeowner’s insurance policy and upgrade after closing. You could also see if the vendors (such as the appraiser, surveyor, inspector or insurance company) would take payment via credit card.
Heather’s Notes: Be mindful that you are in a position to pay off those cards quickly so you don’t rack up large interest payments. If you choose an insurance policy that offers a lower-priced premium, be sure you are covered adequately for liability and are not placing other investments at risk.
5. Take a personal loan against another asset to get cash: Confirm with your lender that your 401(k) and whole life insurance policy loans are not included in your Debt To Income ratio. This means that should you borrow against them, it should not alter the amount you can borrow on the subject property.
6. Ask for Gift Funds From Family. Click HERE for a link for additional information per the IRS site. Speak with your CPA or tax attorney as the donor may be excluded from paying tax on gifts that do not exceed the annual exclusion amount for the calendar year.
Heather’s Notes: Gift funds can be a tax strategy to methodically transfer a small amount of wealth from one person to another while mitigating tax implications. Speak to your tax attorney for further clarification on this option.
While there are a lot of other strategies available, I covered what I considered the most viable options for purchasing in a resort community.
If you have any experience with any of these options or have one that we haven’t covered that you think would be valuable to our client community, please reach out and share! Otherwise, I look forward to connecting tomorrow.
P.S. We recently released a blog on Appraisal Gaps. What it means and what your options may be. If you haven’t read this blog yet, HERE is a link to the article.