Homebuyer’s Appraisal Gap Guide: How to Navigate Low Appraisals & Win Your Dream Home

If you’ve ever considered buying a home, one of your first thoughts has probably been the amount of cash you need to save for a down payment. There are plenty of myths out there about the homebuying process, but few are as prevalent as the belief that you need to put 20% down to buy a home. Below, we’ll explore the ins and outs of down payment requirements, whether you need to pay a 20% down payment to buy a home, how different down payment amounts can impact your mortgage payment, and some tips to help you get some help towards your down payment. Do You Really Need a 20% Down Payment to Buy a Home? The short answer: no. The long answer is still no, but a down payment that’s less than 20% could add an additional cost to your monthly mortgage payment. Before we get into that, let’s first cover down payment minimums. Different loan types come with different down payment minimums. And no, none of those minimums are 20%! In the bullets below, you can see the minimum down payment for the four main loan types: Conventional Loans: These are the most common mortgages, and the minimum down payment can vary from 3% to 5%. However, a down payment of less than 20% means you will have to pay private mortgage insurance (PMI), which protects the lender in case of default. The amount you pay in PMI depends on your loan and down payment size, and once your loan balance drops beneath 78% of the home's value, your lender will cancel your monthly PMI payment. FHA Loans: Backed by the Federal Housing Administration, FHA loans are designed for first-time homebuyers and those with lower credit scores. The minimum down payment for an FHA loan is only 3.5%. USDA Loans: The United States Department of Agriculture offers loans for rural property purchases. Here, you can potentially qualify for a 0% down payment, making homeownership extremely accessible in eligible areas. VA Loans: VA loans are a fantastic option for veterans, active-duty service members, and their spouses. These loans require no down payment, but there are funding fees associated with them. You can read this for more on the intricacies of VA loans. Now that you know that the minimum down payment for any type of mortgage is significantly less than 20%, let’s talk about the most common down payment amount for specific types of homebuyers. What’s the Average Down Payment on a Home? It all depends on what kind of homebuyer you are. The homebuying process is not a one-size-fits-all process. Different buyers have their own unique set of financial needs and desires for their homebuying process. That being said, we sourced some national averages for down payments to help you see that a 20% down payment is more uncommon than you might think. First-Time Homebuyers: The average down payment for first-time homebuyers is around 6% to 7%. Many first-time buyers take advantage of lower down payment options available through FHA, VA, and USDA loans, as well as certain conventional loan programs. Repeat Homebuyers: Those who are already homeowners tend to put down more, averaging around 12% to 16%. This higher percentage is often due to the equity they've built up from previous homes which enables them to make larger down payments. While these average and median down payments are most common, the perfect down payment is the down payment that works best for your unique financial situation. If you have any questions about what your down payment could look like, don’t hesitate to reach out for some expert insight. Down Payment Assistance Programs and Grants Need help with your down payment? You have some options. Coming up with a lump sum to pay your down payment is one of the biggest obstacles preventing many first-time buyers from fulfilling their dreams of homeownership. Fortunately, there are numerous programs and grants available to assist with down payments. These programs can significantly reduce the financial barrier to homeownership: State and Local Programs: Many states and local governments offer grants or low-interest loans to help cover down payments and closing costs. These programs often cater to first-time buyers and those with moderate incomes. My team has helped buyers use state and local programs in the past, so feel free to reach out for guidance. Federal Programs: The Department of Housing and Urban Development (HUD) offers several programs. You can visit hud.gov to see what’s available in your area. Just like the state and local programs, feel free to reach out for some guidance on your options. Lender-Specific Programs: At UMortgage, we have several down payment assistance programs available, including grants, deferred payment loans, and forgivable loans that can help reduce the initial cost of buying a home. If you’re interested in learning more details about my options for you, don’t hesitate to reach out. I hope this blog helped you realize that the idea of a 20% down payment being necessary to buy a home is a myth. Most homebuyers buy with less than 10% down. By understanding the true requirements and available resources, you can make informed decisions and take the first steps toward buying your home. If you feel like a down payment is standing between you and your dreams of homeownership, let’s connect! I have plenty of options that can make homeownership significantly more affordable for you and your family.

Buying a home is a significant financial milestone, but it also requires a significant financial outlay. If you’re dreaming of buying a home, you first need to make sure you have a solid budget in place to pay for the one-time fees like your down payment and closing costs as well as the new recurring expenses that come with homeownership. In this blog, we’ll share some tips to help you budget for your home purchase and ensure a smooth transition into homeownership. Below, you can find more details about how to set your budget, which expenses you should keep in mind, and how to track your budget throughout the buying process and into homeownership. Setting Your Budget Before you start to set money aside, you first need to determine your budget. There are three main things that you need to consider: your buying power, how much you plan to put toward your down payment, and what your closing costs might look like. Determine Your Affordability with a Pre-Approval The first step in budgeting for a home is to assess your financial situation and determine how much you can comfortably afford. Lenders typically recommend that you follow the 28/36 rule. Based on this rule, your monthly housing expenses, including mortgage payments, property taxes, and insurance, should not exceed 28% of your gross monthly income. Total monthly debt payments—which include housing expenses and other existing debts such as student loans or a car payment—should not exceed 36% of your gross monthly income. A great way to get started with a snapshot of your homebuying budget is to work with a UMortgage Loan Originator to get pre-approved. Your pre-approval will use your income, credit, and existing debts to provide you with an estimate of your buying power. If you want an immediate estimate of what you can afford, feel free to use my free affordability calculator. Calculate Your Down Payment Unless you’re buying your home with a VA loan, you’ll have to pay a down payment when you close on your home. Saving for a larger down payment can help you secure a lower interest rate and avoid private mortgage insurance (PMI), which can add significant costs to your monthly payments. However, with a conventional loan, you can buy with as little as 3% down. For more information on down payment minimums, reach out to your UMortgage Loan Originator. Factor in Closing Costs Closing costs are the additional fees and expenses associated with the home-buying process, such as lender fees, title insurance, and property taxes. These costs can range from 2% to 5% of the home's purchase price, so it's crucial to factor them into your budget. As you start working through the beginning stages of your homebuying journey, you can work with your UMortgage Loan Originator for an estimate of your expected closing costs. Accounting for New Expenses While homeownership is exciting, it also comes with a handful of new one-time and ongoing expenses. As you’re budgeting for your home purchase, it’s important to consider the expenses below so you’re prepared when that first new bill hits your mailbox. Homeowners Insurance Homeowners insurance is a mandatory expense that protects your investment against potential damages or losses. Homeowners insurance costs vary depending on factors such as the home's location, age, and construction type. Once you hit the market, you can connect with your UMortgage Loan Originator or real estate agent for a cost estimate. Property taxes are an ongoing expense that homeowners must pay annually or semi-annually. These taxes are based on the assessed value of your home and can vary significantly depending on your location. Typically, your property taxes and homeowners insurance are rolled into your escrow, which adds these expenses incrementally through your monthly mortgage payment. Utilities As a homeowner, you’ll be responsible for paying utilities such as electricity, gas, water, and internet/cable services. These expenses can vary based on the size of your home, energy efficiency, and usage habits. Maintenance and Repairs When you own your home, you won’t be able to rely on your landlord or property management company to maintain your home. As a homeowner, you’ll be responsible for repairing various components, such as the roof, appliances, and HVAC systems. It’s essential to budget for these expenses, as they can be costly and unexpected. When you initially buy your home, your inspection will give you a good gauge of the health of these costly components like HVAC systems, plumbing, and roofs. Tracking Your Budget Setting your budget is a big step in your journey toward homeownership, but the actual act of following that budget is what will enable you to buy your home. As you inch closer to being able to afford to buy your home, follow these steps to ensure you stow away the necessary funds to turn your dreams of homeownership into reality. Create a Detailed Budget Develop a comprehensive budget that includes all your monthly expenses, such as mortgage payments, utilities, insurance, and other recurring costs. This will help you identify areas where you can cut back or allocate funds more effectively. Use Budgeting Tools and Apps There are plenty of great budgeting tools and apps out there that streamline the process of tracking your expenses and monitoring your progress. Many apps offer features like categorizing expenses, setting spending limits, and generating reports. There are also plenty of spreadsheet templates that you can use for a more manual budget-tracking experience. Review and Adjust Regularly Regularly review your budget and adjust as needed. Your financial situation may change over time, and it's essential to adapt your budget accordingly to ensure you stay on track. As you work along your journey towards homeownership, take some time to connect periodically with your UMortgage Loan Originator to share updates on your budget and discover any new products that might make your home purchase more affordable! By following these steps, you'll be well-equipped to budget effectively for your home-buying journey. Remember, proper budgeting not only helps you achieve your homeownership goals but also ensures long-term financial stability. Once you’ve closed on your home, you can continue to follow these steps to protect yourself from unforeseen repairs or save for your next big purchase!

Finding your dream home is a process. From your initial pre-approval to the steps taken searching the housing market and submitting your offer letter, it’s not uncommon to get excited and attached to a home once you’ve had your offer accepted. However, that excitement can quickly turn to stress if your home appraises for a price lower than your offer. Although appraisal gaps aren’t uncommon in a competitive housing market, these gaps can significantly impact your home purchase. Let's dive deeper into understanding what appraisal gaps are, their implications, and strategies to navigate them. What is an Appraisal Gap and Why Do They Occur? An appraisal gap occurs when a professional appraiser determines that a home's market value is lower than the price a buyer offered. This discrepancy can raise concerns for both buyers and lenders and might lead to various complications in the homebuying process. Understanding the Home Appraisal Process Appraisals are conducted by licensed professionals who possess extensive knowledge of the local real estate market. They meticulously analyze the property's characteristics, comparing it to similar recently sold homes in the area, known as "comps." An appraiser considers factors like square footage, the number of bedrooms and bathrooms, the home's age and condition, any recent upgrades or renovations, and the property's location and surrounding neighborhood to land on the appraised value. By meticulously weighing these factors, appraisers arrive at a fair market value estimate for the property. Reasons That a Home Might Appraise Lower Than Your Offer • Competitive Markets: In hot markets with low inventory and high demand, buyers often offer above the asking price to secure a home. This can lead to prices exceeding the actual market value. • Dated Comparisons: The appraiser may compare the property to those that don't accurately reflect recent market trends or the unique aspects of the home being appraised. • Seller Concessions: If a seller agrees to cover certain closing costs or make repairs, the appraiser might lower the value to offset these concessions. How an Appraisal Gap Can Impact Your Offer Appraisal gaps have far-reaching implications for buyers. Mortgage lenders rely heavily on appraisals to ensure they're not lending more money than a home is worth. If a gap exists, the lender won't loan you the full amount needed to cover your offer and can force you to make up the difference in cash. This unexpected financial burden can be a major obstacle for many buyers, especially those looking to buy their first home or those without substantial cash savings to cover the difference. A low appraisal can be used as leverage to renegotiate the price with the seller. However, this isn't always successful, especially in competitive markets where sellers may have other offers. Additionally, renegotiations can delay the closing process and create tension between parties. What to Do If Your Home Appraises Lower Than Your Offer Facing an appraisal gap can be daunting, but it's not the end of the road. These strategies can help you overcome this hurdle and potentially get your homebuying journey back on track: • Cover the Gap with Cash: The most straightforward solution is to pay the difference between the appraised value and your offer price in cash. However, this is only feasible for buyers with ample savings. • Renegotiate the Price: If the seller is motivated, you can try to negotiate a lower price based on the appraisal. This requires strong negotiation skills and a willingness to compromise. • Challenge the Appraisal: If you believe the appraisal is inaccurate, you can dispute it by providing additional evidence of the property's value, such as recent comparable sales data or information about renovations or upgrades the appraiser might have overlooked. • Order a Second Appraisal: Sometimes, getting a second opinion from a different appraiser can reveal a different valuation. However, this comes at an additional cost and may not always yield the desired results. • Exercise Your Appraisal Contingency: Many real estate contracts include appraisal contingencies and clauses that allow buyers to back out of the deal if the appraisal falls short of the offer price. These contingencies often come with deadlines, so it's important to act fast if you wish to exercise them. Appraisal gaps are a common but often stressful aspect of the homebuying process. By understanding what they are, their impact, and the available strategies for addressing them, you can confidently navigate this obstacle and make informed decisions to secure your dream home without compromising your financial well-being. If you experience an appraisal gap or have any concerns about a potential appraisal gap before submitting your offer, feel free to reach out to your UMortgage Loan Originator for expert financial guidance.