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Battle of the Forms: ACA vs. LTV

By: Desiree Brougher, Esq. on in

Often, the loan-to-value ratio and the Appraisal Contingency Addendum are seen as being the same thing and at their basic level, they do the same thing. They both guarantee that the property in question will be valued at a certain amount. However, they are not the same and more importantly, as they are built into the PAR forms, they function very differently.

Selecting the appraiser – Unless a lender is involved, the buyer can hire a certified appraiser of their choosing when using Form ACA. When the appraisal is done by the lender as part of their underwriting process, whether the buyer relies on the LTV or Form ACA to help establish the value, the lender is the one who selects the appraiser.

Property value – Use of Form ACA will allow the parties to set the minimum appraisal value at an exact dollar amount, whether it is a particular figure or the purchase price. In contrast, the LTV is a tool used by lenders to assess the potential risks by comparing the amount of the loan to the appraised value of the property, so there’s math involved. (Ugh. Math.) Depending on how it’s written, the appraisal value could come in below the agreed-upon purchase price, yet the LTV still be met. For example, let’s say Buyer A is making an offer on a property for $100,000 and plans to apply for a loan of $80,000. If the mortgage contingency contains an LTV of 80%, then the condition fails if the appraisal comes in at any number below $100,000. For example, if the property appraises at $95,000, then the LTV for that loan would be 84%, which is too high. Now assume a Buyer B offers $100,000 for the property but is only looking for a mortgage of $50,000 because she is rolling a lot of cash into the deal. That offer also has an LTV of 80%. In that deal, the appraisal would only have to come it at $62,500 to have an LTV at 80%. Sometimes a buyer in this situation is OK with a low appraisal – they are deliberately overpaying for a particular property for some reason, or they anticipate substantial renovations that they believe will increase the property value – but if the buyer wanted the appraisal to be at or near the sale price, this is essentially agent malpractice because they didn’t calculate the appropriate LTV for that deal.

The options – Obviously if an appraisal comes in with a value at or above the anticipated value, then the contingencies are met and the transaction continues. But what if the appraisal comes back with a low value? If the parties have used Form ACA, then the buyer will have the option to terminate the contract and have their deposit refunded. However, if the parties are only using the LTV then the remaining terms of the mortgage contingency apply. Paragraph 8 does not allow a buyer to terminate the contract; rather, the buyer is supposed to make a good faith effort to obtain financing that will meet the LTV. Another option is that the parties could negotiate is a reduction to the purchase price, but a low appraisal is not a requirement to lower the price or to accept the property if the seller offers it.

Helping your client draft the perfect offer or counteroffer is tricky, especially in current market conditions. One decision you’ll have to make is whether to include an appraisal contingency, balancing the desire to make your offer seem acceptable to the other party with your duty to represent your client to the best of your ability. Knowing the key differences between the ACA and the LTV term of the mortgage contingency can make your advice more credible.

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Comments (5)

Comments

  • Karlene Smith   October 23, 2020 at 9:03 am

    Thank you for giving me good material for our next office meeting. My agent have had this training before but they seem to questions what they know when they get contracts from other agents that don’t fill out the section properly or at all. Very few contract we receive has the LTV ration filled out, drives me crazy!!!

    Reply to Karlene Smith
  • anne rubin   October 23, 2020 at 9:08 am

    It seems to me, even after reading your article, that if you do your math correctly, when there is a mortgage involved, the ACA and LTV serve the same purpose. Am I missing something?

    Reply to anne rubin
  • Ryan Thomas   October 23, 2020 at 10:48 am

    There is just more protection with the ACA. If you aren’t going to use a ACA because you think it will weaken the offer than you need to understand your clients finances to know if they are protected. A candid conversation with the client and their lender would be best. Discover if they have the ability to make good on the offer if the LTV isn’t met. Many times the client doesn’t have the extra cash to pay the difference. From the lenders perspective, will the client no longer qualify for the loan if the appraisal comes in low? That is the big question. If they can’t qualify for the loan, then they are protected by the mortgage contingency. But, it’s still more of a grey area that may create a fight, where the ACA makes everything very black and white.

    Reply to Ryan Thomas
  • Lynne Moskol   October 23, 2020 at 11:40 am

    Great article! I virtually always use the appraisal addendum—it makes it clear what value is acceptable to the Buyer and allows them to terminate the agreement if the value comes in short. Most Buyers still think if they don’t get the loan, they are out or can walk—even with a detailed explanation of the agreement of sale. And Sellers often think it’s the higher of the values. This solves the problem.

    Reply to Lynne Moskol
  • Seth Floyd   October 26, 2020 at 10:31 am

    Clearer wording for understanding LTV is ‘loan applied for, to, appraisaed value’. Text example: Loan applied for on contract; 80k compared to appraised value 95k. 80k÷95k = 84%

    Reply to Seth Floyd

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