Appraisal Gap: What You Need to Know and How to Deal with It
Buying a home is a significant investment, and it can be an exciting process. You have read about how important it is to get pre-approved and pre-qualified to stand out from the competition. However, when the home appraises for less than the agreed-upon price during the home appraisal, you risk losing your home or your money. Here is a guide on appraisal gaps and how to deal with the difference.
Appraisal Gap: What Is It?
When you want help raising money to buy a home, your mortgage lender will request a home appraisal for the property. The purpose of the appraisal is for the lender to ensure the amount you are willing to pay for the home is equal to the appraised value. Your lender will hire a licensed appraiser to evaluate and report a home's fair market value.
The appraisal gap refers to the difference between the home's market value as determined by the appraiser and the amount you had agreed to pay for the home. The gap happens when the house appraisal shows the home's fair value is less than what you offered.
Usually, in hot real estate markets, most homebuyers choose to ignore the appraisal gap and proceed with the sale. But, by understanding appraisal gaps and understanding what to do, you can make better home-buying decisions.
What to Do About an Appraisal Gap
You have several options to deal with the appraisal gap. You can:
Renegotiate the Price
Once there is an appraisal gap, discuss it with the seller. Ask them to lower the price to match the appraised value. If they agree to lower the price, they will remove the appraisal gap and ease your financial issues in buying the home.
But if the seller is reluctant to lower the price, you can request them to split the difference. For example, supposing the difference is $12,000, you can ask the seller to reduce the price by $6,000, and you will contribute the $6,000.
Pay the Difference Out-of-pocket
If you have tried renegotiating with the seller, and they won't lower the price, you might choose to pay the difference. Your lender will base the home's value based on the appraised value. So, without securing a lower sales price, you might need to cover the difference out-of-pocket.
However, if you have an appraisal contingency clause in your contract, it might cover this contract.
Dispute the Appraisal
In most cases, the buyer or seller may disagree with the appraisal gap. So, you can dispute the appraisal and request a reconsideration of the home value. The catch, however, are you need to gather enough evidence to show the appraisal is inaccurate.
You might need to prove that there were mistakes in the appraiser's report, the appraiser didn't use relevant comparable sales, or they missed upgrades or features in the property. You must dispute in writing and attach as much evidence as you can.
Cancel the Sale
While this isn't always the pleasant choice, sometimes, it isn't worth paying more than the home is worth. If you have unsuccessfully tried renegotiating with the seller, it might be wise to look into other property.
Get an Appraisal Gap Coverage Clause
Nobody would prefer paying more than a property is worth. However, there isn't a guarantee that an appraisal will match your bid or agreed-upon sales price. The appraisal gap coverage clause saves you from canceling the sale or spending money out-of-pocket to cover the difference.
It also gives you a competitive edge as it guarantees the seller the sale agreement won't fall through due to the appraisal gap. Get an appraisal gap coverage clause and go through our homes for sale in Grand Rapids to stay ahead of the competition.
