Appraisal Guarantees Don’t Have to Be Dangerous

A very common strategy for winning a Bidding War is appraisal guarantees in which a buyer writes into the contract that they are willing to spend "xxx Dollars" above the appraised value if the home doesn't appraise for the sales price. If you have clients who are doing this make sure they are talking with their Loan Officer on how this may impact their finances and can they really afford to do this.

But, for some clients an appraisal guarantee may have very little risk. Let me explain-
Over the last 6 months I have had probably at least 10 clients write an appraisal guarantee and when I underwrote their loan online after they were under contract I didn't even need an appraisal as I received a PIW or Property Inspection Waiver from either Fannie Mae or Freddie Mac. This often happens when our buyer is putting at least 20% down, has great credit, and the seller has closed on a mortgage that was sold to Fannie or Freddie in 2014 or later.
Or we have clients putting 30% or more down and if the appraisal comes in at least 5% low then our clients are still putting roughly 25% down and there should be no change to their loan or rate or payment.
Clients are under contract at $500k on their new home and they're putting 20% down or $100k for a loan amount of $400k. Let's assume the home appraises for $480k. They have 2 options-put an extra $16k down to keep their loan to value at 80% ($480k x 80%) or they pay mortgage insurance because their loan to value is now 83% ($400k/$480k). If they have great credit the mortgage insurance is probably only $50 a month. I then ask them "Do you want to pay an extra $16k at closing or pay an extra $50 a month?" Guess what they say? $16k extra at closing can be a HUGE burden or risk; but an extra $50 a month is most likely not a big deal for them.
Even if a client is only putting 10% down we often only really need 5% down. In my above example their loan to value is now 94% ($450k loan amount/$480k appraisal) and their mortgage insurance cost increases by maybe $50 to $100 a month.
Now FHA loans are hard to do appraisal guarantees with as a huge majority of those buyers are putting the bare minimum amount down. But, I have witnessed many times in my career how gift money from a family member will appear when the need arises. I have this happening currently in which my clients told me in December that gift money was not possible. Now that they really need it they are receiving $25k in gift money.