Appraisal Gap, What Does That Mean?
A typical home purchase and sale agreement has an appraisal contingency: verbiage that states the buyer can call off the deal if the property appraises for less than the price offered. That difference is an appraisal gap. In our current sellers' market where buyers outnumber sellers, some buyers are waiving that contingency to make their offer stronger. They're willing to come up with the difference (the gap). This works for those who may have sold a home or have the money in savings or retirement accounts, but it can be difficult for first-time buyers who may not have those extra funds available.
Appraisal gap coverage is a step you can take between having an appraisal contingency and waiving it. In the purchase agreement the appraisal gap coverage clause says you will pay the difference. Lenders sometimes have had to add this wording on their pre-approval letters to show that the buyers have that difference (gap funds) along with their down payment and closing costs. In a normal market, a buyer had choices if the appraisal came in low. They could call off the deal, ask the seller to reduce the price to match the appraised value, meet in the middle, or pay the gap.
Mortgage lenders won't let you borrow more than the home is worth, the loan is based on the lower of the sales price or the appraised value, so buyers need to think if they want to waive the appraisal contingency.
Robert Groves, Senior Mortgage Broker
5635 N.E. Elam Young Parkway, Suite 308
Hillsboro, OR 97124