A grey area of the purchase process comes immediately after a seller has accepted your offer – the assumption your lender will support your assessment of the property’s value.
With the help of your agent, your proposal should reflect market value and not be a million miles away from the seller’s target price.
But what happens if you come up against the “appraisal gap” – the difference between your offer and the value your lender applies to the property.
In short, a situation where your lender says you’re paying too much and will not fully support your offer.
Whether you’re a first-time buyer or an upsizer looking for your dream home, understanding this concept of “appraisal gap” is crucial to avoid potential financial pitfalls.
Lenders use their own appraised value to determine the loan amount and avoid providing a mortgage that’s more than the property’s worth.
For example, if you agree to pay $600,000 for a home but the appraisal values it at $520,000, you have an $80,000 appraisal gap.
Appraisal gaps are common where competitive buyers start a bidding war, or when markets change rapidly and values rise quickly and assessments can’t keep up.
For first-time buyers, an appraisal gap can create a significant financial hurdle, usually killing a deal. Upsizers might have more equity from their current homes, but it still represents an unexpected expense.
To minimize the risk of an appraisal gap, research comparable sales in the area and consider getting a pre-appraisal.
It’s also essential to work with an experienced agent who can help you negotiate effectively. I’d be delighted to help you.
Here are some actions you can take if you come against the “appraisal gap”.
Contingency clause: Include an appraisal contingency in your purchase agreement, allowing you to back out of the deal if your lender’s appraisal is too low.
Negotiate with the seller: Try to renegotiate the purchase price with the seller, asking them to lower it due to the appraised value.
Pay the difference: If you’re determined to buy the property, you may need to pay the gap yourself. Ensure you have sufficient funds or explore alternative financing options.
Challenge the appraisal: If you believe the appraisal is inaccurate, you can provide supporting documentation to your lender and request a reconsideration.
A second opinion: A second appraisal might help, but you will have to pay for it.
Increase your down payment: If you are able to increase your down payment, the loan amount needed will be less, and thus the gap will be less of a factor.