Written by Seth Nagle on 2021/04/21
What is an Appraisal Gap and How Does it Impact Your Home Purchase
In today’s competitive market where multiple offers and bidding wars result in homes selling above the asking price, appraisal gaps are becoming commonplace. Real estate agents around the country are advising clients to offer sellers many thousands above the asking price if they want the home. The result-- If you hold the winning offer for that dream home an appraisal gap could be in your future.
What is an appraisal gap? Put simply, an appraisal gap is the monetary difference between the purchase price and what the home actually appraised for during the loan application process. Lenders are seeing appraisal gaps more and more as buyers and sellers agree to the fair market price of a property. It is important not to panic if your appraisal comes in lower and you’re left with an appraisal gap which we'll cover below.
What is a Fair Market Price?
A fair market price is a selling price that is linked to current market conditions including supply and demand. Fundamentals linked with an appraisal gap include more buyers than sellers combined with low inventory resulting in a higher purchase price. Consider that realtor.com recently reported that year-over-year housing prices increased 15%. In some hot markets like Austin, Texas inventory declined almost 73% from a year ago causing median listing prices to increase 40%.
What is an Appraisal and Why Do Lenders Require Them?
It is important to understand what an appraisal is and is not. An appraisal is a professional certified appraiser’s opinion on the value of a home. The appraiser considers the home’s age, condition both interior and exterior, size, and square footage, lot size, necessary repairs, upgrades, features, location, what neighboring homes have recently sold for, and the climate of the local housing market. The result—the appraised value.
Why I Might Encounter an Appraisal Gap
Appraisers know how quickly and how much home prices are rising in the area they work in. Appraisers try to reflect these market dynamics which satisfy the lender’s appraisal requirement. In a market where prices are rapidly increasing and there are many home sales, real-time sales prices may lag what the appraiser is seeing in the county or city records.
Lenders whether commercial banks, mortgage bankers, credit unions, or online lenders rely on the appraised value of a home to determine how much they will lend a borrower. It’s a way for them to cover their investment.
What Are My Options Regarding the Appraisal Gap?
The lender will only offer you a loan based on the appraised value. What to do next is a question with several answers. You have decided this is your dream home, you finally got an accepted offer and want to move forward. Consider looking at options on increasing your down payment to make up the difference between the appraised value and the purchase price. That may mean delaying remodeling or fixing up the house or immediately buying new furniture.
You can also go back to the seller and ask to split the appraisal gap difference. In today's market where the seller has buyers lined up to purchase the property, it is unlikely that strategy will be successful.
Going Beyond the Gap and Becoming a Homeowner
What is important to remember is the primary reasons for buying a home right now as interest rates are at historic lows. Because of this, buyers are finding it makes good financial sense to become a homeowner now rather than remain a renter even if there’s an appraisal gap they’ll need to cover.