Watch Those Freebies

Developer-Inventives-Impact-Mortgages Developers have been throwing in much more than the kitchen sink to get home buyers buying.  New cars, vacations, and furniture are just a few of the carrots salespeople have been dangling in front of buyers lately.

But did you know that some of these incentives can adversely affect your financing?  The Globe’s Terrence Belford says appraisers take incentives into account when valuing your new home.

Appraisers will “deduct from the purchase price anything that does not add intrinsic value to the unit itself,” Belford writes in this Globe story.  That includes: cars, boats, furnishings or club memberships, he says. 

A lower value means a higher loan-to-value, which may require a bigger downpayment or higher mortgage default insurance premiums. 

Take this example.  Suppose you’re buying a $250,000 condo and have only $20,000 to put down. Your benevolent condo saleperson offers you a free car valued at $15,000.

The mortgage insurer becomes aware of this (through the bank's/broker's application notes) and, in turn, assumes the unit is worth only $237,000.*  Given that you need a $225,000 mortgage, this shiny new car has just caused your LTV to jump from 92% to 97%. 

All of a sudden you now need to come up with $4,850 more to close (which you don’t have) or get stuck with a cash-back mortgage at a higher rate.  Not an optimal situation!

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*  This scenario might be avoided if the insurer uses an automated appraisal instead of sending out a human being.  However, if your lender’s underwriter sees a freebie in the purchase agreement they may adjust the value downward as well.

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