“My contract clearly says $1 million. Why is the bank only recognizing $900,000 now?”
A client preparing to close on a pre-construction home recently came to Guaranti with that question. The purchase contract had been signed several years earlier at $1 million, and he had built his closing plan around that figure: how much cash to prepare and how much financing would be needed.
Then the appraisal arrived: $900,000.
His first reaction was, “Is the appraisal wrong?” The property was still the same property, and the contract still showed the original price. Why would the lender be working with a different number at closing?
This is a common point of confusion for pre-construction buyers. In mortgage financing, the original purchase price and the property’s appraised value today are not the same concept.
Guaranti perspective: The purchase price records the amount agreed when the contract was signed. The appraisal reflects the lender’s assessment of the property’s value during the mortgage review.
Purchase price is not today’s appraised value
The purchase price is the amount the buyer and developer agreed to when the contract was signed years ago.
When the buyer later applies for a mortgage, the lender may also need to confirm the property’s value under its own requirements. Where an appraisal is required, the question is: based on the property and market information available now, what is this home worth today?
An appraisal is not a new verdict on whether the buyer “overpaid” or “got a deal” years earlier. What has changed is time.
Several years may pass between signing a pre-construction contract and completing the purchase. The contract price does not move with time, but the market does not remain frozen on the signing date.
Where did the $900,000 figure come from?
An appraiser does not determine value by simply looking at the property and choosing a number. The review generally considers the property itself and recent sales information for comparable homes, including:
- what similar units in the same development have recently sold for;
- differences in size, floor, exposure and view;
- how relevant comparable sales in the surrounding area have performed.
Even within the same development, two units of similar size will not necessarily receive identical appraisals.
The purchase contract tells us what the buyer agreed to pay at the time. Today’s appraisal relies on the market information available today.
The real issue is not simply a $100,000 difference
Return to the client’s situation. His down payment and mortgage plan had been built around a $1 million purchase price. The appraisal was now $900,000.
The more useful question was no longer simply, “Why is it $100,000 lower?” It was: could the $900,000 appraisal change the original mortgage and closing plan?
The amount a mortgage can support depends not only on the applicant’s financial capacity. It may also be affected by the property value and the requirements of the specific lending product. If the available mortgage amount is reduced, the buyer may need to revisit how the remaining closing funds will be arranged.
An appraisal gap is not only a difference on paper. It can become a funding gap at closing.
Does a lower appraisal mean there are no options?
Not necessarily.
When an appraisal comes in below expectations, the first step is to understand the facts:
- Why did the appraisal reach this value?
- Is the property information accurate?
- Is the market information used in the appraisal sufficiently relevant?
- Will this valuation actually affect the mortgage amount?
- If it does, how large is the resulting funding gap?
Some situations may allow further verification or review. Others may require the mortgage or closing funds to be reorganized early.
The important point is not to panic at the $900,000 figure. It is to understand what that figure means for the closing.
Guaranti perspective
In the previous issue, we looked at how an underwriter assesses a mortgage application. But every mortgage also has another side that is easy to overlook: the property.
Pre-construction buyers often focus on the question, “How much will the bank approve for me?” Financing also requires a second question: “How much mortgage can this property support?”
In Guaranti’s view, a pre-construction closing therefore comes down to two questions:
- Can the borrower support the financing?
- Can the property support the mortgage?
A change on either side can affect the final funding plan. That is why preparing for a pre-construction closing involves more than one mortgage application—it means planning the closing as a whole.
This article is general information. It is not an approval, a quote, or financial, tax or legal advice. Property valuations, borrowing capacity and applicable terms must be assessed by the relevant professionals using the complete file.
First published on Guaranti’s WeChat account.