WHAT DOES COVERING AN APPRAISAL GAP MEAN?
Over the past few years, there has been a lot of buzz around the term “appraisal gap coverage” due to the rise in home values and the competitive, multiple-offer environment. But what does it really mean?
When you purchase a home with a mortgage, the lender typically requires an appraisal to validate the purchase price and “protect” themselves to ensure that they are only loaning you what they are told the home is “worth” based on comparable homes that have sold. This is also to protect you so that you are not underwater on your home value before you even settle.
However, in a competitive market when home prices surge, the appraised value may fall short of the agreed-upon price, creating a gap that needs to be addressed. Therefore, offers are being made with stronger, more creative terms, such as providing assurance that any difference between the contract price and the appraised value (or up to a certain amount of the difference), will be made up in additional cash at settlement. Essentially, in order to get competitive against multiple offers, buyers are offering to cover the difference between the appraised value, and the contract price (ie “the gap”), so that the seller still gets the agreed-upon price.
If you have some extra cash saved up, this may be a great option to consider if you find yourself in a competitive situation. It’s important, however, to understand the risk involved with covering an appraisal gap, along with your options if the appraisal does happen to come in lower (restructuring your loan amount, getting a gift, etc).
It’s important that you speak with your lender before assuming you can actually make up the difference if the appraisal comes in low — you don’t want to drain your entire savings account or rainy day fund in doing so.
Looking for an experienced agent to help guide you and protect you in this aggressive market? Send me a message and let’s chat!