The real estate market over the last few years has not been particularly kind to prospective homeowners or even those wanting to move to a different home from the place where they currently live. Prices have skyrocketed, while the number of listings has remained relatively low.
Buyers often find themselves competing with multiple other people for the same property and needing to bid well over the asking price to get the seller to even look at their offer.
What happens, then, if the appraisal for the property comes in lower than the offer that you made on a home?
An appraisal gap could derail the transaction
When the amount you offered to pay for a property is substantially higher than the value the appraiser sets, the lender may not want to finance the transaction. Buyers may need to come up with the money to cover the gap between their offer and the appraised value of the property, or they may even need to look for another lender so that they can have a new appraisal performed.
Otherwise, the buyer may have no choice but to back out from the transaction, as they will not have financing to cover the full purchase amount. The obvious issue with an appraisal gap, other than the fact that the closing may not take place, is that the buyer’s earnest money could be at risk.
Protecting yourself with an appraisal contingency is especially important during times when real estate prices rise quickly. Such a contingency allows you to cancel the closing if the appraisal comes in too low. A financing contingency could also help, as it will allow you to back out of the transaction if your lender does not agree to approve the final mortgage.
Learning more about the challenges that may arise during a real estate transaction can help both buyers and sellers work toward a smooth closing process.