Kevin Hearden, Product Development Director
The low supply of homes for sale, combined with high demand, has made this perhaps the most competitive housing market for homebuyers that the mortgage industry has ever experienced. And while some of the challenges created by such an extreme seller’s market are obvious to buyers, there is one challenge lurking that will likely catch them by surprise – the low appraisal.
Challenges facing homebuyers
The most obvious challenge facing those looking to buy is, of course, actually finding a home to buy! Nationally the number of listings dropped considerably over the course of a year. Realtor.com estimated that as of May 2021, active listings were down 51% over the same period last year.
This low inventory creates a ripple effect of challenges. With low supply and high demand, prices rise: the market has seen a 15% increase in median list price year-over-year as of May, again according to Realtor.com. And that’s just list price!
To compete in such a market, those hoping to buy a home often submit offers that exceed the asking or list price to make their offer more attractive. In fact, according to a recent Redfin report, 48% of homes sold for above their asking price — 20% higher than same time last year.
While this over-asking-price strategy may help the potential homebuyer win the bid, it may also create an unanticipated challenge, one that may either cost them a lot more money at closing, or perhaps threaten the deal itself. Yes, I’m talking about the dreaded low appraisal.
Overcoming the low appraisal
It’s an all-too-common scenario, so chances are you’ve heard it play out many times. Heck, chances are it has happened to one of your customers or real estate agent referral partners: the appraisal comes in lower than the accepted offer, leaving borrowers to make up the difference.
However, you can show your borrowers and referral partners how you can not only help save the deal but avoid significant additional out-of-pocket costs – with little to no change in the monthly mortgage payment. And the irony is, the solution to avoiding those additional expenses is the very thing too many borrowers try to avoid — private mortgage insurance (MI).
Let’s look at an example
After years of saving or building equity, and months of racing to new listings and bidding against others, our homebuyers, Jill and John, have found their home AND had an offer accepted! Yes, they had to “overbid” by offering $400,000 on a home that was listed at $380,000 but, hey, that’s what it takes in this market, right?
They believe the smart choice is to put down 20% down, or $80,000 in this scenario, to avoid paying MI. Unfortunately, the home doesn’t appraise at $400,000; instead the appraisal comes in at the original asking price of $380,000.
So now what? Jill and John could walk away from the deal or see if the sellers will renegotiate – perhaps unlikely in this market. Or they may be inclined to pay the extra $16,000 to maintain a 20% loan-to-value, if they have the financial resources to do so.
Use private mortgage insurance to avoid losing the deal or paying more out of pocket!
Another option would be to simply accept a higher loan-to-value (LTV). Yes, doing that would require Jill and John to rely on private MI – but that makes all the difference. Consider the benefits of using private MI in this scenario:
1. Closing costs may be comparable depending on the MI program
2. Monthly mortgage payment will be similar to what they expected to pay when they first had their offer accepted
3. They’ll receive a .25% decrease in the loan-level price adjustment (LLPA) or credit fee charged by Fannie Mae or Freddie Mac by moving from 80% LTV to 85% LTV*
Ready to see the math? Check out how Jill’s options stack up in this comparison.
By showing your borrowers the power of private mortgage insurance, you can create solutions, save transactions and help more people achieve their goal of homeownership.
*For all mortgages except HomeReady® and Home Possible® loans
The opinions and insights expressed in this blog are solely those of its author, Kevin Hearden, and do not necessarily represent the views of either Mortgage Guaranty Insurance Corporation or any of its parent, affiliates, or subsidiaries (collectively, “MGIC”). Neither MGIC nor any of its officers, directors, employees or agents makes any representations or warranties of any kind regarding the soundness, reliability, accuracy or completeness of any opinion, insight, recommendation, data, or other information contained in this blog, or its suitability for any intended purpose.
Product Development Director, MGIC
Kevin Hearden is a Product Development Director for MGIC. He leads various product initiatives and works closely with the MGIC sales team to develop product solutions. Kevin has over 30 years of experience in the mortgage banking industry including leadership roles in secondary marketing and product development.