Hi there, I’m Marcie Billen, a real estate agent in Norman, Oklahoma. I have several videos on my channel discussing various real estate contracts used here in Oklahoma. Today, I want to cover the three main types of loans that we commonly encounter. I will walk you through the different loan documents and highlight the differences between each of them in regards to appraisals.
Conventional Loan
So I know this is not my typical content discussing Oklahoma, but I believe this is of utmost importance. When we’re drafting an offer to present to a seller, it’s crucial to disclose the type of loan we’re securing. Typically, I come across three main types: conventional loans, FHA, and VA. There are also other types like USDA and HUD 184, which are variations of FHA loans. Today, I want to focus on these three primary loan types and specifically highlight the differences in the processes we see for appraisals and what that means for you once you’re under contract.
Loan Amount
Let’s begin with the conventional loan document for Oklahoma. In section one, we must inform the seller about the loan amount you’ll be obtaining, which goes in this blank. I won’t delve into the other details here; I want to concentrate on appraisal-related issues with you.
Be sure to reach out to me with your appraisal questions; I’m happy to help!
Appraised Value
Moving on to section two, we encounter the appraised value. This clause states that if the property’s appraised value for loan purposes falls below the purchase price, the buyer has the right to cancel the contract within three days after receiving notice of the appraised value. This cancellation notice should be delivered to the seller through the listing broker. In the event of contract cancellation, both the buyer and seller, through their signatures on this contract, instruct the escrow holder to refund the earnest money in full to the buyer, while the ad charge shall be returned to the seller.
What does this all mean for a conventional loan? Let’s say you have a property under contract for $200,000, but it appraises for only $195,000. First, we need to inform the listing agent that the appraisal came in low. In such a scenario, you won’t be able to secure a loan for $200,000 on a property appraised at $195,000. So, what are your options?
The first option is to cancel the contract and walk away. In this case, you get to keep your earnest money, as outlined in this paragraph of the contract. Earnest money is typically applied toward the purchase of the property.
Another option during this period is to renegotiate with the seller. This can happen in one of three ways:
- The best-case scenario is that the seller agrees to reduce the price to $195,000. This is ideal for you as the buyer, especially if I’m representing you.
- The second way is a compromise where both the buyer and seller meet halfway or somewhere in between. For instance, the seller may reduce the price by $2,000, and the buyer may increase their offer by $2,000. The specifics depend on the situation.
- The last option involves the buyer covering the entire difference between $195,000 and $200,000, effectively bringing an additional $5,000 to the closing table.
That covers the details of a conventional loan.
FHA LOAN
The other two types of loans, FHA and VA, have a slight difference in one aspect. I’ll be showcasing these documents for you. Here’s the FHA document. Unlike the conventional one-page document, both the FHA and VA MBA documents span two pages. The FHA insured loan is quite similar; we have the loan amount specified here. Typically, for an FHA loan, you’ll be putting down three and a half percent, although you can opt for a higher down payment if you choose. The appraisal requirements are the key difference to note.
Appraisal Requirements
Number four addresses appraisal requirements. In the event repairs are mandated by the FHA appraisal and no mutual agreement is reached between the buyer and seller, both parties shall have five days from the outset to arrive at an acceptable arrangement regarding the cost of these repairs. If a written agreement is not reached within the specified time frame, the contract shall terminate, and the earnest money will be refunded to the buyer.
The FHA loan differs in that it may impose appraisal requirements on the property. This does not imply that the home inspector is pointing out issues to be fixed specifically for FHA. Since it’s a government-backed loan, the government takes extra precautions to ensure the property meets their desired condition. Appraisal requirements do not apply to every FHA transaction, but they can arise. While they may pose challenges, they are not insurmountable, and I’ve successfully navigated through many.
Examples:
Examples of FHA appraisal requirements I’ve encountered include drainage issues necessitating landscaping work, safety concerns, such as preventing falls from great heights, and a focus on the condition of exterior paint, ensuring there is no peeling paint. These are common appraisal requirements, though others may arise depending on the circumstances. This distinction sets FHA loans apart. We have five days to determine if the seller agrees to address these appraisal requirements, which can be a significant difference compared to conventional loans.
Appraised Value
Now, let’s discuss the matter of coming in undervalued. This is addressed in number two, the FHA mandatory clock clause. Essentially, FHA loans don’t work in the same way as conventional loans. They won’t approve a loan for $200,000 if the property appraises for only $195,000. In this case, you have options. You can agree to pay the difference, cancel the contract and receive your earnest money back, similar to the conventional loan, or we can renegotiate with the seller if neither of the previous options suits your preferences. These are the primary distinctions between conventional and FHA loans.
VA Guaranteed Loan
Now, let’s transition to VA loans. Here’s the VA loan document, and it shares similarities with FHA but comes with its own distinctions. At the top, you’ll notice it’s still a government-backed loan, which means there will be some unique aspects to consider. We start by disclosing to the seller the loan amount you’ll be securing. As you may already know, with VA loans, you have the flexibility to secure a 100% loan while also having the option to put down as much as you desire.
Moving to section two, we encounter the VA mandatory clause, and from there, we’ll delve into the appraisal requirements. The VA mandatory clause closely resembles the FHA mandatory clause. If the property’s appraisal falls short, you have the option to exit the contract and have your earnest money returned. Alternatively, we can explore renegotiating with the seller. These options mirror those offered by FHA loans.
Appraisal Requirements
Appraisal requirements for VA loans are also quite similar. I’ve encountered situations where the appraiser has noted conditions that need attention. I hesitate to call them ‘issues’ because they primarily revolve around ensuring the safety and proper maintenance of your future home.
Regarding appraisal requirements for VA loans, if repairs are deemed necessary by the VA appraisal, and an agreement is not mutually reached between the buyer and seller, both parties have five days from being notified to arrive at an acceptable arrangement regarding the cost of these repairs. It’s essential to understand that this doesn’t necessarily mean the seller is obligated to cover all repair costs. The specifics of such agreements can vary widely and depend on the nature of the repairs, the seller’s willingness, and the buyer’s preferences. It’s a negotiation process. If, within the specified time frame, an agreement isn’t reached on the appraisal requirements, the contract will terminate, and the earnest money shall be refunded to the buyer.
So, in summary, VA loans share similarities with FHA loans, including appraisal requirements and the option to address under-appraised properties. If you’re unable to come to an agreement on appraisal-related matters, you have the opportunity to exit the contract and receive your earnest money back.
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