This article defines the appraisal gap and outlines possible solutions for the home buyer to discuss with their realtor and loan officer before submitting an offer. Being prepared in the event of an appraisal gap puts the borrower in the best position to get an accepted offer or successfully close the purchase if a shortage arises.
by Christian Scully
I've found that the most helpful topics to discuss on BL+F are questions that I am often asked by either borrowers or realtors. Appraisal gaps have always been an issue, but their instances have exploded in the past couple years. Home values have grown massively nationwide. Buyers are often paying in cash above asking price and waiving all contingencies. This sets the stage for a home selling for greater than a licensed appraiser can value the property. The difference between the selling price of a home and its appraised value is called an appraisal gap or an appraisal shortage.
For example if a home sells for $250,000 and the appraiser values the home at $225,000 - there is a $25,000 appraisal gap. A typical purchase and sale agreement would state that the contract is contingent upon the home appraising for at least $250,000. When the buyer applies for a mortgage it will be based on the sale price of $250,000, which combined with their down payment will dictate their loan-to-value ratio. A conditional approval from the lender based on these terms would state that the loan approval is subject to the appraisal of the property at or above $250,000.
There are five important options for a buyer and their realtor to know about preparing for and solving an appraisal gap. The chosen path completely depends on the buyer's goals and finances.
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Thoughts, ideas, lessons-learned, inspiration, how-tos and more from a journey to own and invest in real estate, and helping borrowers navigate the mortgage process as a licensed loan originator.