How to Buy a House Over the Appraised Value

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You've found the perfect home and fallen in love with it. The house is at a fair price for the neighborhood, so you sign the contract. Then the appraisal comes back, and due to factors like foreclosures and short sales in the neighborhood, the appraised value of your dream home is lower than the purchase price. This will affect the amount of money you can borrow on the home, since the lender uses the lower value (either the appraised value or the purchase price) to determine the maximum loan amount it will grant. Should this happen, there are ways that you can purchase the home at a higher price than the appraised value.

Get a copy of the appraisal from the lender and open up a discussion with the seller. If it's an FHA appraisal, the appraised value will stick with the home for six months, even if the contract is terminated and another buyer comes in who agrees to the listed price.

Ask the seller to reduce the purchase price to the appraised price. Since almost every buyer needs mortgage funding to purchase a home, it's highly unlikely that the seller will be able to find a buyer who won't be negatively affected by a low appraisal. The worst the seller can say is no.

Pay the difference in cash. If you were planning to put a large amount down, you may be able to reduce the amount you were going to put down and still qualify for the loan. Keep in mind that a higher loan-to-value ratio will result in a higher interest rate and higher payments. In addition, if putting less money down brings your loan value to more than 80 percent of the appraised value, you'll have to pay mortgage insurance.

Decide on a compromise with the seller if neither of you can afford to drop the price completely or pay the difference in cash. As long as you still want the house, it's better for both of you than walking away from the deal.

See if the seller and your lender will allow for the seller to hold a privately held second mortgage. Some lenders will not allow for a total mortgage amount over a certain percent, but others might allow it if your credit is good enough, you're putting enough money down and the lender feels it's an acceptable risk.

Get a second appraisal. You may have to change lenders to do this, and there's no guarantee that another appraisal would be higher (it may even be lower). FHA appraisals require the appraiser to register his appraisal to the property, so a second appraisal is not an option in those cases.

Tips & Warnings

  • Only consider paying more than the appraised price if the house is a solid value in a good neighborhood and will appreciate when the market turns around. You need to consider this as a long-term investment that you'll own or live in for many years to come. Generally, houses only appreciate a few percentage points each year in a healthy, stable market, so you may be upside down for a long time.

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