A contract is written at $455,000 and the appraisal comes in at $430,000. The borrower planned to put 20% down on the contract price. If the lender requires 80% LTV based on the lower appraisal and the price is unchanged, how does the appraisal affect the loan basis and cash needed?
Correct Answer
A) The value basis is $430,000; an 80% loan is $344,000, needing $20,000 more cash
A. The loan falls to $344,000, increasing cash toward the price by $20,000. Originally: $455,000 × 80% = $364,000 loan and $91,000 cash toward the price. With the lower appraisal: $430,000 × 80% = $344,000 loan. The unchanged $455,000 price needs $111,000 cash, or $20,000 more. Scope and exceptions: The $25,000 appraisal gap is not itself the additional cash relative to the original plan: 80% of that gap is $20,000. Closing costs, deposits, credits and renegotiation are outside this comparison. Source: Calculation of the LTV Ratio: purchase money transactions — https://selling-guide.fanniemae.com/sel/b2-1.2-01/loan-value-ltv-ratios
Why This Is the Correct Answer
A. The loan falls to $344,000, increasing cash toward the price by $20,000. Originally: $455,000 × 80% = $364,000 loan and $91,000 cash toward the price. With the lower appraisal: $430,000 × 80% = $344,000 loan. The unchanged $455,000 price needs $111,000 cash, or $20,000 more. Scope and exceptions: The $25,000 appraisal gap is not itself the additional cash relative to the original plan: 80% of that gap is $20,000. Closing costs, deposits, credits and renegotiation are outside this comparison.
Why the Other Options Are Wrong
Option B: The sale is automatically canceled whenever the appraisal is lower
A lower appraisal does not establish automatic cancellation under an unspecified contract.
Option C: The lender uses the average of the price and appraisal
The stated rule uses the lower value, not an average.
Option D: The value basis remains $455,000 because the contract controls
It ignores the lower appraisal required by the facts.
Exam Tip
Calculate the revised loan, then subtract it from the unchanged price.
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