The Importance of an Appraisal Gap Guarantee

The housing market is still hot right now especially here in Texas. There are many buyers looking for homes with a very small number of homes for sale. This has led to many buyers competing over the same property and some of those buyers making offers above the list price for a home.

This also increases the chances of a home being appraised at a lower value than the price offered to purchase it. Here’s what happens when the appraisal comes in below what the buyer has offered to purchase your home for on the contract that you accepted.

How the appraised value of the home is determined

If you accept an offer from a buyer who is seeking financing help through a mortgage it is almost guaranteed that the lender will require a professional appraisal to be conducted on the property before they approve the loan.

Data from the National Association of Realtors shows that around 87% of homebuyers are using mortgages to purchase a home. A mortgage company is going to require an appraisal to get an official determination of the value of the property and make sure that they are not lending out more money than the home is worth to the borrower. This is seen as a very risky move in the lending world.

A licensed appraiser will come to the property and look it over and make a report of what they determine the property to be worth. They will take into account current comparable sales from homes in the area that are like yours as well as look over the home and take measurements of its size and any upgrades and improvements to the home into account.

What is an appraisal gap?

It is not uncommon for there to be an appraisal gap in a hot seller’s market. An appraisal gap is a difference between the purchase offer that has been accepted by the seller and the official appraised value written in the appraisal report.

If a home appraises above the excepted offer the gap works in favor of the buyer who is seeking a mortgage and makes it easier to obtain loan approval. If the home appraises low which is not uncommon in a competitive situation where a buyer offers well above the list price, the buyer will have difficulty in getting loan approval as the buyer will have to bring cash to the table to make up the difference between the appraised value of the home and what they have offered as a bank will not lend out this amount.

What are the buyers’ options when there is a low appraisal?

A buyer has several options when the appraisal comes in below what they have offered to pay for a home. They can either pay the difference in cash, they can request a reconsideration of the value if they disagreed with the appraisal, or can seek approval from another mortgage lender. They could also come back to the negotiation table with the seller and try to re-negotiate the offer made on the home. They could also walk away from the sale with no negative impact.

The benefit of making sure an appraisal gap guarantee is in place

When accepting an offer above the list price of your home it is good to have some reassurance that the sale will go through in place. It is also helpful for a buyer to include some extra assurance that the higher offer will go off without a hitch. A buyer can help to reassure that the offer above list price will go through by either waving the appraisal contingency or including an appraisal gap guarantee.

An appraisal gap guarantee is a promise that the buyer makes to the seller within the written contract that they will pay the difference between the sales price and the appraisal if it comes in below the offer they have made. Typically, this will be up to a certain dollar amount to help protect the buyer from paying much more than they can afford if the appraisal comes in very low.

It is a good idea as a seller to make sure that an appraisal gap is addressed in the written contract before accepting an offer above the list price. It is also wise for a buyer to make sure that they are setting a dollar cap on the amount they are willing to cover should an appraisal gap occur.

In addition to making sure that the contract addresses any potential for an appraisal gap, a seller should make sure that a buyer can prove they can cover this appraisal gap up to the dollar amount that they have included in the offer contract.

For more information on purchasing a home in Granbury Texas and surrounding areas please contact us anytime.