When purchasing residential real estate, you may encounter an appraisal gap. Appraisal gaps refer to a difference between the seller’s asking price and the value determined at appraisal.
Most lenders will require you to obtain an appraisal before you purchase a property. Appraisals should always be unbiased assessments of the property’s value.
How does an appraisal gap affect your mortgage?
When you enter into a house deal, your purchase may hinge on being approved for financing. Say you agreed to purchase a home contingent on obtaining a mortgage for 70% of the purchase price. If the lender does an appraisal and determines the house to be worth less than the selling price, the lender may only offer you a fraction of the original deal. In this case, you might have to come up with additional money to close the deal.
How can you handle the appraisal gap?
One way to handle an appraisal gap before it happens is to have appraisal gap coverage. Appraisal gap coverage is an insurance policy written into a contract. The seller generally agrees to pay the difference between the appraised value and the sale price. If you do not have the cash to pay the difference or if you do not have gap coverage, you might try to renegotiate for a lower price. You can talk with the homeowner to determine if he or she will be willing to reduce the price to the appraisal value.
If you do not have the cash and the seller does not budge on the price, you can still walk away from a property.
