What is an appraisal gap and how does it affect your mortgage?
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There are instances when a seller may not budget if asked to lower the price to the appraised value. If the seller is impatient, they may reject a request to seek an appraisal review. The seller could also reject the idea of starting a loan with a new lender, since it usually causes delays.
Negotiation with the seller.
If you choose to negotiate with the seller, you may be able to lower the price. You could ask the seller to split the difference or to cut the price to the appraised value. If there are competing offers, however, negotiating with the seller is more unlikely. After all, the seller could opt out entirely and take the next-best offer. In a seller’s market where there are numerous competing offers, negotiation with the seller could be risky.
Things you need to do when dealing with an appraisal gap
There are an additional three things you can do when dealing with an appraisal gap. The first is to decrease your down payment percentage and use the extra money to cover the appraisal gap. For example, let’s say you put down 20% on a $400,000 offer, $80,000 out of pocket, but the appraised value is $380,000. If you use $20,000 of that $80,000 for the appraisal gap, you will be left with $60,000, or 15%, of a down payment. You should know, however, that if you pay less than 20%, you will have to get mortgage insurance, if only temporarily.
Another option is to include an appraisal gap clause, which will protect the homebuyer and seller from having to renegotiate their purchase agreement if the appraisal is lower than expected. Finally, you have the option to terminate the contract, assuming you are within the appraisal contingency period. While this is usually the less appealing option, it may be the only one if the above strategies fail.
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