Sometimes when you're trying to buy a home, your mortgage lender's appraiser says the house is worth less than you agreed to pay. This is known as an appraisal gap or a low appraisal. You may have to pay the difference in cash or renegotiate with the seller to keep the deal alive.
Waiving the appraisal gap means that you, as the buyer, will need to complete the purchase no matter the amount of the appraisal, so make sure you have sufficient cash on hand to make up the difference.
If your appraised value is lower than the agreed upon sales price, you'll have to make up the difference in cash, or cancel the deal.
“It has nothing to do with the seller; it is ordered by your lender, and payment is due regardless of the outcome,” says Maria Jeantet, a real estate agent with Coldwell Banker C&C Properties in Redding, CA. “It is typically paid by the buyer unless specifically negotiated ahead of time to be paid by the seller.”
Yahoo Finance tip: Your purchase contract must include an appraisal contingency, which states you can back out if the appraised amount is too low. Otherwise, you will forfeit the earnest money you put into the deal if you walk.
This payment is fully refundable if you withdraw before the appraisal inspection occurs. Because this is a third-party fee, it's not refundable after the inspection has taken place.
However, if they are using a loan program with a required down payment amount, the down payment will be based on the appraised value if it's lower than the sales price. Therefore, the buyers have to pay the appraisal gap plus the required down payment at closing.
Do sellers usually lower their asking price if the appraised value is lower? Whether the seller decides to lower their asking price will depend on a number of factors, including how motivated they are to sell or if they have other offers above asking price.
The seller is bound by the contract.
Just because the appraisal shows the seller may have underpriced their property, they don't have the right to walk away from the deal.
Appraisal gap coverage can be a good idea for homebuyers, considering it provides protection in case the appraised value of the property is lower than the purchase price.
“In a competitive housing market, where multiple offers are being made on a property, a seller may prefer an offer that waives some or all contingencies,” says Matthew Martinez, CEO of Diamond Real Estate Group in Santa Rosa, California. You can save money if you're paying cash.
The home appraises for less than the sale price.
Often, a low appraisal can also cause issues with financing, as banks aren't willing to provide a loan if the home isn't worth enough to serve as collateral. That means a low appraisal could give the buyer pause and the seller a chance to cancel the sale.
You can ask the sellers to lower the purchase price to meet the appraised value or ask for other seller concessions to make up the gap. Request a new appraisal: You can dispute the appraisal and request a new one by submitting a reconsideration of value document in writing.
A low appraisal can put your dream home out of reach if you're a buyer. Meanwhile, for a seller, a low appraisal can impact not only the sale of your current home but also the purchase of your next home.
So, even if the appraisal soars above the contract price, buyers won't be able to use that extra value to beef up their down payment. A higher appraisal essentially hints that the buyers might have snagged a sweeter deal than they thought, paying less than what other similar homes in the neighborhood are going for.
Experts suggest buyers prepare to offer 1-3% above the list price, but some real estate agents say 5% is an even better buffer to add to your budget. If you make an offer above the amount you were approved for by your lender and the appraisal doesn't support it, you're on the hook for the difference.
Real estate experts estimate between 10-20% of appraisals come in lower than the sale price. But in today's competitive housing market, more homes are selling with multiple offers and the chances of an appraisal gap is increasing. When there is an appraisal gap you have five options. Renegotiate the deal.
Most appraisals come in at the right price. According to a report by Corporate Settlement Solutions (CSS), only about 8% of properties sold in the first half of 2024 sold for more than their appraised values.
Appraisal gaps can be tricky to navigate, but you have options. When faced with an appraisal gap in a home purchase, you could pay the difference in cash, try to renegotiate the purchase price or walk away from the deal. How Much Is My House Worth? See your free home value estimate in less than two minutes.
An appraisal gap refers to the difference between a home's appraised market value and the purchase price and occurs when the appraiser's assessment of the property's worth doesn't match the price a buyer and seller have agreed on.
An appraisal gap contingency provides a legal way to get out of a sale contract, including recovering earnest money. Without this contingency, you may have to negotiate to cancel the contract and allow the seller to keep some of the earnest money that you paid.
Ask your lender to let you know about their appraisal waiver requirements. To qualify for an appraisal waiver, you'll need a strong credit score. You'll also need to be purchasing or refinancing a one-unit property, such as a single-family home or condominium.
Location of the home
First, costs vary based on how far appraisers have to travel. Appraisers in rural states may charge more because of how far they have to travel. Second, in high-demand real estate markets, like California, appraisers may charge more because the need for appraisals is higher.
Provide your lender with a written description of the problem with the appraisal or evaluation and provide any evidence you may have. For example, if the appraisal or evaluation has an incorrect living area size for the subject property, provide factual evidence which supports your position.