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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Appraisal Gap
One of the most important factors in a home purchase is the price of the property.
Two prices hold significance in a home purchase transaction. One, the home price agreed upon by the buyer and the seller, and two, the appraised home value by the certified appraiser.
The lender is required to do an appraisal to ensure that the property is worth the value it is being sold for to protect its share of the interest in the property.
Most of the time these values are close to proceeding with the transaction, however, sometimes these values may have huge differences and may cause issues to proceed with the transaction. In this post, we will understand what is an appraisal gap and how it works in detail.
What Is An Appraisal Gap?
An appraisal gap occurs when the appraised value of a home for sale is less than the purchase price agreed upon between the homebuyer and the seller.
The difference in appraised values and agreed-upon values is common in hot real estate markets. Real estate prices skyrocket when the number of buyers exceeds the number of homes for sale on the market.
It is challenging to keep up the pace of appraised values if the home values rise faster than the sales of comparable houses in the area.
An example of the difference in grade is if you are buying a property for sale for $250,000 and want to put a 10% down payment on $275,000 to stand out from the other bidders.
If the offer is accepted, the assessed value comes to $260,000. Unless the seller agrees to lower the price, you have to get the extra $15,000 from your pocket.
What To Do In Case Of An Appraisal Gap?
Gaps in appraisals can certainly derail the sales process and in some cases send both buyers and sellers might have to begin the process from start.
However, there are several ways buyers can deal with appraisal differences so they can continue with the transaction.
Paying the difference amount
The easiest way to close the difference in appraisal is for the buyer to pay the difference. Of course, this is not always financially feasible. If you have cash on hand, you can pay the difference in cash.
Or, if you’re more comfortable, you can cash out some of your investments or tap into your retirement funds penalty-free to pay the difference.
Taking a separate loan to cover the difference amount may also be one of the options. However, the lender will consider this new loan for calculating your affordability while qualifying you for the mortgage.
Another option would be to check with your mortgage lender if you can qualify for a higher loan amount. This way you don’t have to come up with the difference amount from your pocket. Else, reducing the down payment and opting for PMI could also be one of the options.
Renegotiation
Another option available to buyers facing an appraisal gap is to renegotiate the purchase price of the home with the seller.
This option is only relevant if you have the appraisal contingency in your sales contract.
You can ask the seller to lower the price to match the appraised value. Sellers may be willing to negotiate based on the time and effort that they have invested in selling the property.
You can also reduce the difference to a level you can afford by asking the seller to split the difference amount.
New Appraisal And New Financing
An appraisal can also be challenged if substantial evidence is available to show that the value of the appraisal was inaccurate, including that the appraiser misjudged the market and valued the property incorrectly.
In the event of a successful dispute, you can seek new funding and receive a new offer.
This may result in an appraisal that matches the sale price but is not guaranteed. This process can be time-consuming and sellers may not want to go through it, especially if they think they have more offers from other buyers.
What Is Appraisal Gap Clause?
The appraisal guarantee clause is not to be mistaken for insurance, even if it sounds like it.
Instead, it is a contractual clause that binds the purchase of a home to the buyer even if the appraised value is low.
Pay close attention to this part of the contract and set a limit on how much you’re willing to pay or request it to be removed to close an appraisal difference.
What Is Appraisal Contingency?
An appraisal contingency is one of the best legal ways to cancel the sales agreement if the appraised value does not match the agreed sale price.
You can cancel the contract and keep your earnest money deposit (EMD) just in case the appraised value is less than the agreed-upon sales price.
If the contract is terminated without any appraisal contingency, the seller may keep your EMD, which is usually 1% to 3% of the property sales price.
Conclusion
Appraisal gaps can cause roadblocks when closing a property sale because the real value of the property is assumed to be less than the agreed-upon sale price.
It could be an unpleasant experience for both the seller and the homebuyer.
However, with a little preparation in the sales contract, both parties can protect themselves depending on the type of market in which the sale is happening.
A seller can use an appraisal guarantee clause, and the buyer can use an appraisal contingency.
