That would be a sweet deal wouldn’t it? Instead of having to come up with the 20% that is usually required for a down payment on a conventional loan, you could borrow the 20% from the home’s equity and have the 20% rolled into your principle loan amount. Unfortunately, you’re not going to be able to find a lender who is willing to do this.
In determining what amount of money it is willing to loan a homebuyer, a mortgage company considers two things: the appraised value of the home to be purchased and the actual purchase price. The lender will only lend a homebuyer whichever is the lower of the two. That is why it is crucial for both the seller and the buyer that the appraisal price be consistent with the sale price. If they are inconsistent, the seller will have trouble finding a buyer who can get a mortgage for the home.
Let’s say a buyer has agreed to pay $300,000 for a house. The buyer needs to have a 20% down payment which is $60,000. If the appraisal for the home comes in at at least $240,000 that is all the bank will loan even though the home is selling for $300,000. To loan more would be a bad decision on the bank’s part because if the homebuyer defaults on the loan, on paper all the bank would be able to get for the house would be $240,000. Banks don’t like to take those kinds of risks.
But let’s say that house that is selling for $300,000 is appraised for $360,000. Why wouldn’t the bank give a loan for $360,000 and allow the buyers to use the extra $60,000 for the down payment? It’s simply a matter of policy. Again, it is the policy of lenders to only lend a homebuyer whichever amount comes in lower – the purchase price or the appraisal price. Since the purchase price is lower, the bank will go with the purchase price due to its policies.
Since it is not against the law to lend the extra money, it may be possible to find a lender who would buck the standard policy of only lending the lower of the two amounts. However, finding one may be harder than finding the 20% you need for the down payment in the first place.