- The Washington Times - Wednesday, April 13, 2005

Q:I have been house hunting for the past three months. We have made five offers

on five homes and have lost every one. We have great credit and good income and have been preapproved by

our lender.

We plan on putting 5 percent down. Our preapproval letter states that the only condition for final approval is receipt of a satisfactory appraisal. We have even included an escalation clause of up to

10 percent.

We keep losing out on bids because other buyers are waiving the appraisal contingency. We can’t waive the appraisal because

if the value comes in low, we don’t have the money to pay the difference.

Any suggestions?

A: It’s a mad world out there. The severe imbalance between buyers and sellers is causing a dramatic run-up in prices and a frenetic mind-set among buyers.

For folks who are unfamiliar with the house-buying process, let me explain your dilemma.

Let’s say the listing price is of the house is $300,000. You make an offer to purchase the house at full price. You also agree to outbid any other legitimate offer to a maximum price of $330,000 (a 10 percent escalation clause).

Your down payment is 5 percent, which amounts to somewhere between $15,000 and $16,500, depending on the final sales price.

You have protected yourself by making your loan approval contingent on the appraisal. This means the appraised value must come in at the final sales price or higher. If it doesn’t, you can be released from the contract and get your earnest-money deposit back.

The folks who waive the appraisal contingency are committing to buy the house regardless of the appraised value. Lenders don’t care what the appraised value is, as long as the loan amount is based upon the lower of either the purchase price or the value stated in the report.

Here’s what could happen if you waive the appraisal report:

Let’s say you and a seller ratify a contract with a purchase price of $320,000. You apply for a 95 percent mortgage with a 5 percent down payment, seeking a loan amount of $304,000. Your down payment would be $16,000.

The appraiser compiles the report and sees that the most recent comparable sales have sold between $290,000 and $310,000. After a thorough study, he comes in with a value of $310,000.

Because your application is for 95 percent financing, the lender lowers your loan amount to 95 percent of $310,000, or $294,500. But you agreed to pay $320,000. Your down payment is now $25,500.

Clearly, you are wise to keep your loan approval subject to the appraisal. The downside, of course, is that in this crazy market, your offers are being rejected.

It’s a tough situation. I see three alternatives.

• Have your lender approve you for a 100 percent mortgage program. This will allow you to finance more in the event that a problem occurs with the appraisal. Expect the rate and terms to be less favorable than with a 95 percent program.

• If you’re not prepared to take out a 100 percent loan, your second choice is to continue what you are doing. However, if the imbalance between buyers and sellers continues, your offers will continue to be inferior.

Housing is market driven, plain and simple.

m The last option is to wait. Spring is traditionally a brisk time in real estate. Maybe you should shelve your house hunt until August. I don’t know when, but the market eventually will come back more in to balance.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail ([email protected]@pmcmortgage.com).

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