Trying to understand lending when property appraised below contract price

[Sam Leon]

I have a situation where the property I have listed appraised below contract price.

This is a condo unit in south Florida with an HOA.

As an example, the contract price is 250k, there is an adjacent condo that recently sold for 235K.  There is no other recently sold data point to use, that condo unit is the only single data point.  The buyer's lender ordered an appraisal, it came back with the 235K number.

I had mentioned to the appraiser that the adjacent unit that sold for 235K sold for that number for good reasons. The owner is in Europe and wanted to get out quick, it has deferred repairs and maintenance issues, it was listed on the MLS and sold to a cash buyer sight unseen in less than one day. But the appraiser did what he did and came back with the same price. Fine.

My understanding with conventional lending is, if the appraised price is 235K, then the lender will typically approves up to 80% of that which is 188K, this means the buyer will have to pay 62,000 of down payment to make up the difference to the contract price.  In this case, the buyer is paying a high down payment of 40% (100K) on the contract and asking 150K from the lender, which in my mind should cover more than the difference between the appraised value and contract price.

But I was told that is not how this works.  In this case, the lender has asked the buyer to put up an extra $15000 (the difference between contract and appraised value), which prompted the buyer to ask for a price reduction because of the extra "out of pocket" cost to buyer.

I am trying to understand this, because I did some asking around, and no one can explain this to me, why would the lender ask for extra money from the buyer to cover the difference if the buyer already has a high down payment that more than cover the difference?  The explanation I got is this is a complicated algorithm and unrelated to the down payment.  So I guess I am trying to understand how this works or is this just voodoo math?

[Stephanie Medellin]

Just reading your question again -

Say the buyer is still paying $250,000 and putting $100,000 down.  Originally that was 40% of the property value, but now the property value is only $235,000.

$15,000 of the $100,000 is now going to cover the difference between the value and the purchase price, since the lender won't lend on that.

Now the buyer has $85,000 left of the original $100,000.  That's 36.17% of $235,000.  So the buyer's down payment is 36.17%, not 40%, and he's paying the $15,000 difference in cash.

I hope that makes sense.