If the house I am buying appraises for higher than what I’ve agreed to pay for it, does this unexpected equity in the home mean I can apply it toward my down payment and therefore put less of my own money down?

When an appraisal is higher than the purchase price, it might seem like you could use any “unanticipated equity” to reduce how much cash you need to bring to closing — but that’s a common misconception.

Even if the home appraises for more than the purchase price, your loan and down payment are still based on the lower appraised value, or the purchase price. This is a standard rule across most mortgage loan types, including:

• Fannie Mae (Conventional): Down payment is based on the lower appraised value or purchase price. A higher appraisal doesn’t reduce your required cash-to-close.
• Freddie Mac (Conventional): The same rule applies — loan calculations use the lower of the two values.
• FHA Loans: FHA also uses the lesser appraised value or purchase price to determine your loan-to-value ratio and required down payment.
• USDA Loans: USDA financing follows the same guideline. Even if the home appraises higher, it doesn’t reduce the down payment requirement.
• VA Loans: While VA loans often require no down payment for eligible borrowers, the loan amount is still capped by the lesser of the purchase price or appraised value. So, you can’t use any excess appraised value to increase your borrowing power or cover closing costs.

If you’re in a situation where the home you’re buying appraises for more than you agreed to buy it for, sit tight and be patient. It’s in your best interest to wait a few months and then talk to an experienced mortgage broker to discuss your refinancing options.

Have a question? Schedule a meeting with a mortgage expert today.

Blue Water Mortgage is licensed in New Hampshire, Maine, Massachusetts, Connecticut, Florida and North Carolina.