Roughly half of all houses sold in the U.S. now sell for more than their asking price, according to AP News. That’s nice for sellers, but it can create very real issues for the buyers who need to secure financing from lenders in order to fund their home purchases. After all, lenders depend on appraised value, not market value, when they decide how much they’ll agree to loan a buyer for the purchase of a particular piece of property. As a result, many buyers are stumbling over a problem called the appraisal gap.
Why the Appraisal Gap Is Complicating Home Deals
Understanding what appraisal gaps are and why they can complicate home deals can prepare you to keep your cool in today’s hot housing market. Knowing the strategies that you can use to close this gap will help you be prepared to navigate this potential hurdle.
Defining Appraisal Gaps
What exactly are appraisal gaps? As Keeping Current Matters explains, an appraisal gap occurs when the price on the sales contract doesn’t match the value on the home appraisal. Unfortunately for today’s homebuyers, the combination of high demand and low inventory is making appraisal gaps increasingly common. In April 2021, 19 percent of homes sold in the U.S. had appraisals values that were below their contract prices. While appraisal gaps aren’t a brand-new problem, that’s twice the percentage reported in both April 2019 and April 2020. Savvy homebuyers are paying attention to the trend. They’re accounting for the issue in their homebuying strategy. How do they do it? The first step is to explore why these gaps can cause difficulties for homebuyers who are planning to use a home loan to buy their dream homes.
Why Do Appraisal Gaps Complicate Real Estate Transactions?
Appraisal gaps can bring real estate transactions to a screeching halt if the would-be buyer is planning to use a home loan and is caught flat-footed by the news. As Apartment Therapy reports, the appraiser’s role is to serve as the lender’s eyes; their job is to assess the actual value of the property because the home is used to secure the loan. Should the buyer default, the lender needs to know that they will be able to sell the property to recoup their investment. As a result, they’re only willing to make loans for amounts that are equal to or less than what it’s really worth. In times when a real estate market is really hot, people are sometimes willing to pay more than what experts believe a home is truly worth in order to secure a property.
How does this work? Consider this example. A homebuyer sees a home that’s perfect for their needs that’s listed for $200,000. Several other buyers are also bidding for it, so they put in an offer for $250,000 and no contingencies, and the seller accepts it. The house appraises for $210,000. That means the lender will only agree to finance $210,000. The homebuyer must find some way to close this financial gap or lose the home.
Strategies for Closing Appraisal Gaps
What can homebuyers do to prevent appraisal gaps from snarling their homebuying plans? Awareness of the problem is the first step in any winning strategy because it lets you begin mapping out possible solutions. According to Real Trends, homebuyers should accept that appraisals “can’t calculate the emotional value of homeownership, nor the current appreciation in value.” Closing appraisal gaps doesn’t always equal equity gains, so homebuyers should proceed with caution and never spend more than they can afford.
How do homebuyers close appraisal gaps? With so many eager buyers, few sellers are willing to negotiate, but there are still several strategies for homebuyers to choose from.
As HousingWire points out, some people are dipping deeper into their savings, accepting gifts from friends and family, borrowing against their retirement accounts, or borrowing from relatives. If the borrower is able to provide a larger down payment to cover the difference created by the appraisal gap, they can move forward with the home purchase.
Apartment Therapy offers another option: disputing the appraisal. Appraisers rely on comps, or comparable sales, to make their assessment. If prices in the neighborhood have been rising rapidly, but the appraiser used comps from months ago, you might be able to make the argument that the price should be adjusted for the current market. However, there’s no guarantee that it will work. In fact, there’s always a chance that the new appraisal could come back even lower.
How PrimeLending Denver Can Help
Navigating a home purchase can be tricky, especially in today’s hot real estate market. Are you ready to buy a house? PrimeLending Denver is ready to assist you with user-friendly answers to your questions. If you confront an appraisal gap, you can turn to us for help. We strive to make this process as simple and hassle-free as possible.
Check out the chart below to see how an appraisal gap could impact your mortgage’s loan-to-value ratio and PMI:
At PrimeLending Denver, we offer friendly, expert guidance and smart home financing solutions that make homeownership affordable and rewarding. We understand that buying a home is one of the most important financial decisions of your life. Contact us today to discover how we can help you reach your housing goals.