For the past two years, the real estate industry and the national press has been focused on the impact of declining property values on mortgage loans. As a result, when buying a Lake Tahoe home it has become increasingly important that you have a clear understanding of the relationship between property value and mortgage loan amount.
In real estate lending, there are three key numbers;
• Sale price,
• Appraised value and
• Loan amount.
As we all know, in a typical purchase transaction, the seller states an “asking price”… the buyer usually responds with an offered price that is somewhat lower… and after a gut-wrenching series of negotiations, the buyer and seller agree to a single price. This is the “sale or contract price”. It is the price the buyer has contractually agreed to pay for the property.
Typically, the buyer then selects a lender and the lender hires a professionally trained and licensed real estate appraiser. The appraiser conducts a formal study of the property, usually by comparing the property under contract (the subject property) to other, similar properties that have sold recently, nearby to determine the property’s market value or “appraised value”.
The appraised value is critical to the sales transaction and here’s why… because the lender has probably promised (committed) to loan the borrower, some portion of the property’s “value”.
If the lender promised to loan 90% of the property value and the property is valued at $500,000, then the lender will loan $450,000. We say that the lender is making a 90% LTV (Loan-to-Value) loan. It means that the borrower must come up with the remainder of the purchase price as down payment. In this case, the down payment would be $50,000 (10% down).
Here’s the tricky part… the lender does NOT promise to lend 90% of the “Sale Price”… the lender promises to loan 90% of the “value”… and the lender usually defines “value” as being either sales price or appraised value, whichever is LOWER!
Here’s what this means… the buyer in our earlier example has a 90% LTV loan and has negotiated a sales price of $500,000. This buyer expects to get a $450,000 loan and pay a down-payment of $50,000.
Now, if the appraised value of the property is $500,000 or more then the lender’s “value” will be the $500,000 sale price… and the buyer will happily go to closing.
But there is another possibility… if the appraised value of the property is $450,000, then the lender’s “value” is $450,000… the 90% loan will be for only $405,000. But the buyer is still obligated to pay $500,000 for the property… with a down payment of $95,000… and at this point, things get… intense!
Today, many sales contracts and loan programs require that the property “appraise”… that is, that if the property’s appraised value is less than the sale price, then the buyer has the option of voiding the sales contract… or the seller can reduce the selling price… but the bottom line is that the transaction is in danger and even if salvaged, the drama, turmoil, and cost can be significant.
The relationship between sale price, appraised value, and loan amount is one of the most critical aspects of purchasing a property… it is a relationship that must be understood by the buyer and the seller, particularly in today’s volatile market.
To learn more about property values and mortgage lending in the Lake Tahoe area, download one of our free “Special Reports”… it will help prepare you for your real estate purchase and you can’t beat the price…
For the past two years, the real estate industry and the national press has been focused on the impact of declining property values on mortgage loans. As a result, when buying a Lake Tahoe home it has become increasingly important that you have a clear understanding of the relationship between property value and mortgage loan amount.
In real estate lending, there are three key numbers;
• Sale price,
• Appraised value and
• Loan amount.
As we all know, in a typical purchase transaction, the seller states an “asking price”… the buyer usually responds with an offered price that is somewhat lower… and after a gut-wrenching series of negotiations, the buyer and seller agree to a single price. This is the “sale or contract price”. It is the price the buyer has contractually agreed to pay for the property.
Typically, the buyer then selects a lender and the lender hires a professionally trained and licensed real estate appraiser. The appraiser conducts a formal study of the property, usually by comparing the property under contract (the subject property) to other, similar properties that have sold recently, nearby to determine the property’s market value or “appraised value”.
The appraised value is critical to the sales transaction and here’s why… because the lender has probably promised (committed) to loan the borrower, some portion of the property’s “value”.
If the lender promised to loan 90% of the property value and the property is valued at $500,000, then the lender will loan $450,000. We say that the lender is making a 90% LTV (Loan-to-Value) loan. It means that the borrower must come up with the remainder of the purchase price as down payment. In this case, the down payment would be $50,000 (10% down).
Here’s the tricky part… the lender does NOT promise to lend 90% of the “Sale Price”… the lender promises to loan 90% of the “value”… and the lender usually defines “value” as being either sales price or appraised value, whichever is LOWER!
Here’s what this means… the buyer in our earlier example has a 90% LTV loan and has negotiated a sales price of $500,000. This buyer expects to get a $450,000 loan and pay a down-payment of $50,000.
Now, if the appraised value of the property is $500,000 or more then the lender’s “value” will be the $500,000 sale price… and the buyer will happily go to closing.
But there is another possibility… if the appraised value of the property is $450,000, then the lender’s “value” is $450,000… the 90% loan will be for only $405,000. But the buyer is still obligated to pay $500,000 for the property… with a down payment of $95,000… and at this point, things get… intense!
Today, many sales contracts and loan programs require that the property “appraise”… that is, that if the property’s appraised value is less than the sale price, then the buyer has the option of voiding the sales contract… or the seller can reduce the selling price… but the bottom line is that the transaction is in danger and even if salvaged, the drama, turmoil, and cost can be significant.
The relationship between sale price, appraised value, and loan amount is one of the most critical aspects of purchasing a property… it is a relationship that must be understood by the buyer and the seller, particularly in today’s volatile market.
To learn more about property values and mortgage lending in the Lake Tahoe area, download one of our free “Special Reports”… it will help prepare you for your real estate purchase and you can’t beat the price…