What is an Appraisal Gap? - Homespire Mortgage (2024)

FAQs

What is an Appraisal Gap? - Homespire Mortgage? ›

In this market, many home buyers are still paying above fair market value for homes, which leads to a gap between the sales price and the appraised value, called an appraisal gap.

When Is An Appraisal Gap Coverage Clause Necessary? While no one wants to pay more than a home is worth, it may be necessary in a competitive seller's market. If you want your bid to outshine the others, an appraisal gap coverage clause may be worth including.

If you need a mortgage, you'll have to bring more cash to the closing table—your down payment plus the gap (or the amount written into your appraisal gap clause, if you have one).

A grant or loan forgivable over five years may be used to fill this gap. When a loan is used to finance the appraisal gap in a purchase and rehab transaction, the borrower may receive two mortgages, one to cover the purchase price of the property, and a second to finance rehab.

An appraisal gap is the difference between the offer price and the home's actual appraised value. It's common in a market when sellers are forced to over-offer in a competitive market. So, if you offered $365,000 on a home and it appraises for $353,000, you have an appraisal gap of $12,000.

While how often home appraisals come in low can depend on market conditions, research by Fannie Mae shows that in a balanced market, around 8% of appraisals come in below the contract price.

Appraisal gaps can cause trouble when it comes to finalizing the sale of a home, because they suggest that the actual value of the property is less than the agreed-upon sale price. However, these gaps are relatively common. With a little preparation in the sale contract, both parties can protect themselves.

Example 2. If a buyer makes an offer of $200,000 on a home and the appraised value is $220,000, and there is an appraisal gap clause, then the buyer will need to fork out the extra $20,000.

While it's always great for the property appraisal to come back higher than the amount you agreed to buy it for, this is no way affects the loan amount you need to qualify for, or the down payment you need to close on the mortgage loan. Both conventional and unconventional mortgage products offer similar requirements.

Does FHA allow appraisal gap? ›

Value Concerns

Furthermore, you are stuck with that FHA appraisal for 120 days. You must use that value for future FHA offers until 120 days pass. The FHA buyer is allowed to make up the appraisal gap in cash, but most FHA buyers don't have extra money to throw at the deal.

The most common causes of an appraisal gap include: Hot real estate markets: When there's a surge in demand for homes but limited supply, multiple buyers may compete for the same property. This competition pushes prices above what an appraiser might consider the home's market value.

For example, let's say you put down 20% on a $400,000 offer, $80,000 out of pocket, but the appraised value is $380,000. If you use $20,000 of that $80,000 for the appraisal gap, you will be left with $60,000, or 15%, of a down payment.

If a home is appraised to be higher than the asking price, the lender will only issue a mortgage for the appraisal amount. This leaves the borrower to either cover the remaining cost on their own or return to searching for a home with a listed price that matches the appraised value.

Appraisal gaps in today's market

Rapidly rising home prices have led to an increasingly common challenge for home buyers and sellers: the appraisal gap. When a home's appraised value comes in lower than the contracted purchase price, buyers must either cover the difference, renegotiate, or walk away.

If you've made an offer on a home and your lender's appraisal values the property at less than you've bid, the lender won't approve the full mortgage amount even if you qualify for it. In order for the purchase to go through, you may need to supply extra cash.

While it's always great for the property appraisal to come back higher than the amount you agreed to buy it for, this is no way affects the loan amount you need to qualify for, or the down payment you need to close on the mortgage loan. Both conventional and unconventional mortgage products offer similar requirements.

An appraisal gap is the difference between the purchase offer and the appraised value of the home. If the home appraises high (above the asking price), the gap is in favor of the buyer obtaining a mortgage.