Will an appraisal gap derail your homebuying efforts?
It can be hard to make a competitive offer when you find the home of your dreams. Whether you are a first-time home buyer looking for a starter space for your family or you are ready to upgrade now that you have children in your home, it may take weeks to find a single property that fits your needs.
You may have to compete with other buyers when you do find the right home. There is a significant gap between real estate supply and demand that even increasing federal interest rates have yet to fully resolve. Buyers need to come to the table with their best offer, especially if they want a property in a prestigious neighborhood.
Making a competitive offer might meme committing to pay the maximum amount that your lender will theoretically finance. The problem with this approach is that you could eventually face an appraisal gap.
What is an appraisal gap?
As the name implies, an appraisal gap involves a difference between the appraised value of the property and the purchase price. Either because of unexpected defects or a drop in local selling prices, the appraiser reviewing the property for your lender may determine that the home is not worth as much as you offered to pay for it.
Even if the lender approved you for a certain amount of financing, they also want to know that the property is worth that much or more before funding the mortgage. When the appraisal shows the home isn’t worth what you offered for it, your lender may not move forward with the transaction.
How do you address an appraisal gap?
The easiest way to correct an appraisal gap issue is to produce liquid capital to pay the difference between the appraised value and the purchase price. However, coming up with thousands of dollars without warning isn’t necessarily a realistic solution.
Some home buyers try applying for a mortgage with another lender and hope that another appraiser will be more generous. Others may renegotiate with the seller, who may be receptive to slightly lowering the price to avoid the frustrations of realistic the property. Otherwise, the best approach is usually a preventative one. Being careful not to offer more than the property is likely worth is the surest way to prevent an appraisal gap.
Understanding the challenges you may face when buying residential property can help you get to the closing table successfully.