An article in the July issue about the Addendum Concerning Right to Terminate Due to Lender’s Appraisal (TXR 1948) used an example that did not take into account factors that would typically apply. The following example corrects that oversight. Find the full, corrected article at texasrealestate.com/magazine.
Can a buyer insert a number in Paragraph 2(ii) that is based on the additional cash they are willing to bring to closing rather than the appraisal amount?
No. The form only allows you to put in the opinion of value—the appraised value—because it is referencing the appraisal language in Paragraph 2B of the Third Party Financing Addendum. You will have to do some math to come up with a number that works for your buyers based on the additional cash they are willing to bring. Here is a simple formula that can be used to determine the opinion of value to insert in Paragraph 2(ii). This formula assumes the lender will maintain the same loan to value (LTV) ratio with the lower appraised value.
Sales Price – (Additional Cash / LTV%) = Paragraph 2(ii) amount
For example, the sales price of a home is $250,000 and the buyers want to finance $225,000 with a $25,000 down payment. A 90% LTV. The buyers are willing to put down an additional $4,500 if necessary. The buyers could insert $245,000 in Paragraph 2(ii) as the minimum appraisal they are willing to accept. With a $245,000 appraised value and 90% LTV, the loan amount will be reduced to $220,500. The down payment will be increased to $29,500 to total the $250,000 sales price. The buyers will be required to bring an additional $4,500 cash with their original $25,000 down payment.
$250,000 – ($4,500 / 90%) = $245,000
Note: Any additional cash a buyer may be required to bring depends on the lender’s reduction of the loan amount. The lender’s decision to reduce the loan amount is based on numerous factors, including underwriting requirements and the type of loan, which may affect the above calculations.