intend to make a large down payment on my house.
How can I protect myself from unintentionally
overpaying for my home?
realize you could overpay tens of thousands
of dollars for your new home and not even know
it? Let me show you how it happens:
Mr. and Mrs. Jones want to retire in Richmond
after having lived and worked in "Jersey"
for the last 30 years. They want to retire to
a warmer climate and a cheaper cost of living,
not to mention the real estate tax savings!
After having been gone for 30 years. They've
lived in Jersey for a long time and are used
to paying an exorbitant amount of money to buy
a home. When they came to Richmond, they found
a home that fit them perfectly "for only
$150,000!". They walked into an open house
at 2:00 on a Sunday afternoon. The same home
in "Jersey" would cost them $250,000.
They immediately signed a contract with the
listing agent who was holding the open house
and closed in thirty days after signing the
They paid $60,000 down and got a loan for $90,000
at 6.5%. Boy did they get a good deal! At least
they think they did! They got a loan from a
Richmond Lender. The house was appraised by
the bank, so they were confident all was well.
What they didn't realize was that the home was
only worth $120,000, not the $150,000 they paid!
When their new Richmond friends thanked the
Jones' for raising their property values so
much by paying so much for their home, the Jones'
responded that the bank appraised the house
and they didn't overpay! They pointed to the
fact that the bank gave them a loan of $90,000!
What they didn't understand is that all the
bank cares about is that the loan the bank gave
Mr. and Mrs. Jones did not exceed 80% of the
house's appraised value, not sales price!
Since the home was worth and appraised for $120,000
the maximum amount of money the bank was willing
to lend to Mr. and Mrs. Jones was 80% of $120,000
which was $96,000! The extra down payment the
Jones' paid caused them to grossly overpay for
their new home!
The best way to protect yourself from a scenario
like this is to put a clause in the contract
that says that "this home is to appraise
at least for the contract price, or the purchaser
has the right to void the contract".
Something this simple would have saved Mr. and
Mrs. Jones $30,000!