How do lenders handle instant equity?

[Christopher Giannino]

If you're able to buy a deal where you have instant equity because you bought the property for less than what the appraisal came back at (and I'm talking like $10,000-15,000) how do lenders handle this... Do you get better rates on the loan because the LTV is at say 70% vs. 80% (assuming you put 20% down)? Do you get to put less money out of your pocket for a down payment because you can use some of the instant equity as a DP? or do lenders just say your lucky because you bought below market so you have instant equity.

[Chris Mason]

Originally posted by @Robert Gregg:

It doesn't depend at all. The rule is that when you are purchasing a property that the lender will base their underwriting on the lesser of the purchase price or the appraised value. If you are refinancing after purchase, within one year of the purchase, then the lender will use the lesser of the purchase price or the appraised value of the property (at the time of the refinance).  After one year has passed, the valuation is just based on the appraised value.

A lot of the "it depends" type responses were from private and hard money lenders. Sure, it might help, you might get a rate of 10.5% instead of 11% with the HML. Or maybe they charge 3.5 points instead of 4 points upfront. There are HML that specialize in fix-n-flips, where getting a great deal on purchase price relative to appraisal is actually a basic requirement.

On our end (this is directed at the lurkers), for good interest rate 30YF & low points type loans backed by the government in some form or another, Robert is 100% correct.

In six months when/if you wish to refinance, future-current appraised value will be used, and purchase price from 6+ months ago will be disregarded as a data-point, meaning appraisal will be the only basis of LTV. If such a thing is anticipated, I generally suggest considering bumping the rate for a lender credit that will cover refinance closing costs.