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Property Value Too Low For Desired Loan Amount?
For every transacted property, there is a value price and a transaction price.
These are 2 very different things that you must not get confused over.
Let’s take yourself as an example. If you are selling your house, and your agent informs you that the valuer appraised it’s value at $300,000, would you sell it for that price?
Of course not!
You will tell your agent to list it at $350,000!
After a few viewings and some hard bargaining with buyers, the final transaction price could come down to $310,000.
So in this case, the value of the house is $300,000 and the transaction price is $310,000. Can you now see that these 2 items are different things?
When it comes to your mortgage, you will want the value of the property in question to have as high a value as possible.
This is because the loan quantum you will be qualified for will be a percentage to the property valuation. In mortgage jargon, it is called the loan-to-value (LTV).
Assuming that the maximum LTV you can get is 80%. This means that even though you have bought a house at $500,000, and it’s value is $400,000, the maximum loan amount will come up to 80% of $400,000. Which will be $320,000 loan. If you really needed a $400,000 loan to close the deal, you can effectively turn your back on the deal because you are simply unable to finance it due to the low valuation. Starting to see the picture?
Appraisers actually make an effort to match a home’s value to the transaction price. But at times, that is simply impossible as they have to protect the interest of those who rely on their data as well.
What you can do
In the event that the property you are buying has a much lower value that the transaction price, there are only so many actions you can take.
The first one is to negotiate with the seller on the price. Sellers will already have an estimate on what their home is worth.
In a stable market, they know that they are just trying their luck. So if you ask nicely and let them know of your challenging circumstances, maybe, just maybe they would be willing to lower the price.
The next obvious option is to pay a bigger down payment than you initially planned.
Most people would borrow from their family and friends. Some even take up a loan from their employers.
When you do make a larger down payment you could qualify for better terms on your mortgage as well. Or you could for predatory lenders who would not blink an eye to give you what you want as long as you agree to their high interest rates and charges.
The last resort is to challenge the appraiser’s evaluation.
Very often they can miss out important details of a property that can have a noticeable impact on the value.
When many of these add up, it could take out a huge chunk off it’s value. These include quality furnishing, overlooked livable space, etc.
If they refuse to budge, and you insist on challenge value, request for a second appraisal from a different valuer and see what the new numbers are.
Setting A Realistic Budget To Buy A House
If there is no such thing as a budget, everyone would be snapping up penthouses in the most luxurious cities all over the world.
The likelihood is that you are someone with a budget. But the drawback is that often times, you are not certain of what that exactly is.
A budget is one of the most important elements before committing to a high ticket item. And this is a house we are talking about. It could very well be your biggest priced item to buy in your lifetime.
So how can you not spend some time to work out your budget for it?
Not only should you draw up your gross household income, but you must also take into account the monthly liabilities you have. These include car loans, education loans and personals, etc.
To categorize your budget, draw up all your incoming cash flow against all your outgoing cash flow.
Write down every cost item you are aware of that you will incur on a regular recurring basis.
This include your insurance premium, vehicle servicing, and even your Christmas budget.
Only when you write down these details will you have a better picture of whether you can actually afford the house you are planning to buy.
To avoid overlooking items. Go and track back your expenses for the last years.
Take a scrutinize your credit card statements, banks statements, Paypal account, etc. You are specifically looking for items that you have to pay on a recurring basis.
It could be a monthly costs, bi-annually, yearly, or even 5-yearly.
If you can identify spending patterns, you will realize how useful this exercise is.
Very often, we do not realize that we are running into negative cash flow each month even though we are drawing a healthy salary.
You only have to refer to the tribunal courts to realize that overspending is a real life issue that common people face. And usually a victim does not realize he has this problem until something blows up.
To make sure you take this budgeting exercise seriously, get your spouse to hold you accountable on working out the details of you incomes and costs estimates. You will of course hold your partner accountable as well.
When we buy a home, there is a tempting tendency to go for upsells.
For example, if you have a $250,000 budget for a 1,000 square feet home, why not go for a 1,500 square feet house next door at $300,000.
While we could be searching for better value on a purchase, we can forget about whether we can afford that and how taxing it will be on our family lifestyle over the coming years.
And in the excitement of buying a new property, we can also forget that we will have other financial commitments to service other than the mortgage. Remember that the monthly home loan repayment is just 1 item among the many that you have uncovered in your expense exercise.
Once you signed up to a loan, it could be too late to realize that you cannot really afford it over the long or short term.