A home appraisal gap is a discrepancy between your offer on the home and what a licensed appraiser deems your home is actually worth. A lender will almost always order a home appraisal if you are financing with a mortgage. If the home you are under contract to purchase appraises at your full offer price, the appraiser verifies that the property is worth what you offered (or more). If everything else is in line, in this situation the lender often approves your mortgage with no hassle.
If an appraisal comes in low, you could be left with an appraisal gap situation. When this happens, lenders will typically only loan you up to the appraised value. In this situation you can negotiate with the seller whether you will pay the gap, ask them to lower the purchase price, split the difference, or back-out completely if you have an appraisal contingency.
However, in this market in order to win homes, some clients are having their agent put appraisal gap coverage in their offer to strengthen it and stand above the competition. Appraisal gap coverage is typically used in a seller’s market where the buyer needs to incentivize the seller to accept their offer. Let’s use a home listed for $385,000 as an example. This home has received multiple offers and you know you need a strong offer to stand a chance. Let’s say you offer $415,000 with $5,000 in appraisal gap coverage. Let’s say the home appraises for $400,000 so the lender would only secure a home for $400,000 and you would be on the hook for paying that $15,000 difference. You could either choose to pay the gap, re-negotiate with the seller, or back-out of the contract completely. One thing to note about appraisal gap coverage is that your loan won’t cover it, so it’s important to have that much cash on hand if the situation presents itself.
If you have questions about appraisal gaps or are thinking about buying or selling your home, call us today! We’d love to help you!
Source: What Appraisal Gap Coverage is (& How It Can Help You Win in a Hot Market) (biggerpockets.com)