I came up with this solution for first-time home buyers last week who are using the Fannie Mae HomeReady loan program that offers a lower monthly payment with either 3% or 5% down. I came up with this solution for first-time home buyers last week who are using the Fannie Mae HomeReady loan program that offers a lower monthly payment with either 3% or 5% down.

Our buyers write the contract to put 5% down instead of 3%. This is assuming they have enough money to put 5% down. Then, if the appraisal comes in low their loan to value may increase from 95% to 96% or 97%. But, there is very little change to their loan terms. Thus, they could offer a bigger appraisal guarantee.

For example, they offer $350k on a home with 5% down which is $17,500. Their interest rate currently would be 4.625% and their payment would look like this—

Principal and interest $1709

Mortgage insurance   $144

Total before taxes and home owners insurance $1853

Now, let’s assume their new home only appraises only for $345k. They can still borrow up to $334,650 (97% of the appraised value). But, let’s assume they still put $17,500 down and keep their loan amount at $332,500 which puts their loan to value at 96.4% which is acceptable up to 97%. Here is how their payment would look—

Principal and interest $1709 (nothing changes)

Mortgage insurance $  175 (small increase)

Total before taxes and homeowners insurance $1884, an increase of $31 a month.

But, their down payment and cash to close stays the same. The only thing that changes is their monthly payment. Thus, the appraisal guarantee does not cost them extra money at closing. It just costs them extra every month. They thus could offer up to a $7,000 appraisal guarantee without bringing more money to closing.