How do Appraisal Gaps work and what is an example of an appraisal gap? If you are currently in the market to buy a home in the Littleton or surrounding area, I am sure that you have heard the term appraisal gap come up many times? Especially if you’ve submitted any offers recently. Well, I’m here to show you how an appraisal gap works and give you an example of an appraisal gap so you can further understand it. An appraisal gap clause in the purchase contract is something currently going on in the Littleton housing market, especially with multiple offer situations. What an appraisal gap means, or what it does for you, is basically in a bidding war allows you to offer a higher price, but yet if the appraisal does not come in at that price, it says that you, the buyer will cover the difference in cash.
An appraisal gap clause in the purchase contract is something currently going on in the Littleton Colorado housing market, especially with multiple offer situations. What an appraisal gap means, or what it does for you, is basically in a bidding war allows you to offer a higher price, but yet if the appraisal does not come in at that price, it says that you, the buyer will cover the difference in cash. So let’s take an example: The asking price is $500,000. Let’s say you offer $540,000. Within that offer, you put in there that any appraisal shortage or the appraisal gap of your offer price and the appraised value, you’re going to make up that difference. So in this example, you offered $540,000, let’s say the appraisal comes in at $520,000, the gap here in this example is $20,000. So basically what this says is with your loan, any down payment or closing costs that you’ve been approved for, you also have to bring an ADDITIONAL $20,000 to get the deal to the closing table. So I want to be clear on that, this is on top of what you’re approved for on your current financing.
So you might be asking yourself why can’t my loan cover any of that? Well, here’s why. Lenders will only loan you the money based upon appraised value or the purchase price, whatever is less. They then base your loan scenario, based upon the lower of one of those two, and then beyond that, you’re responsible for any difference. And you also need to make sure ahead of time that if you do have to bridge an appraisal gap with more cash, that if it takes away from any of your funds to close on your loan, that you can still actually still qualify with that lesser down payment if you have to go that route. Now, what I just stated is very important because a mistake on any of that could cost you thousands of dollars because of your earnest money that is being held as part of the contract.
Now buying a home in this current housing market can be exciting, but very, very stressful, and also very competitive to the point where the excitement can make you offer things like in the previous example and in this market is usually the only way that you are going to win a bidding war. But just to be sure again, that you’ve thought about this ahead of time and you’ve spoken to your lender and made sure that you will not impact anything on your loan if you ever have to use this provision of the contract. So for more questions and more information, please reach out to me any time.
With over 25 years experience in the mortgage lending and also a real estate agent, I’d be more than happy to help you understand how this appraisal gap works, along with many other tactics to help you win the bidding wars that are currently going on. And I hope you found this information beneficial. Please follow me on my YouTube channel and like me on my Facebook business page and follow me on my Instagram page and keep up with this crazy, crazy market.