When buying or selling a home, there are two figures that matter most: the agreed-upon purchase price and the appraised value of the home. Sometimes these figures don’t line up, and that can cause problems when it comes time to finalize the sale. No seller wants to sell their home for significantly less than it is worth, and no lender will offer a buyer a mortgage amount that is more than the home is worth.
So what does it mean when these two prices are significantly different than expected, and how can it affect the sale of the home? Here’s everything you need to know about the appraisal gap.
What is an appraisal gap?
When a home’s sale price is higher than its appraised price, it creates what’s called an appraisal gap. Simply put, the gap is the difference between the agreed upon purchase price and the price that the home is determined to be worth, as assessed by a licensed professional appraiser.
“The purchase price is what a buyer and seller feel the home is worth, while an appraisal tells you what the value is, based on other homes that have sold that are similar,” explains Esther Phillips, senior vice president and director of sales at Key Mortgage Services in Naperville, Illinois. “All standard mortgage loans use the appraised value to substantiate the loan.”
Here’s a quick example to help illustrate how the appraisal gap works. Let’s say you are a buyer interested in a home whose asking price is $350,000. You make an offer for the full amount and the seller accepts. But when your lender’s appraiser assesses the home, they determine that the actual value is only $310,000. The result is an appraisal gap of $40,000, meaning you are asking your mortgage servicer to lend you $40,000 more than the appraised value of the home. That gap will need to be bridged somehow for the sale to go forward.
How to deal with an appraisal gap
An appraisal gap can certainly disrupt the sale process, and in some cases it can send both buyer and seller back to the drawing board. But it does not necessarily tank the sale. In fact, there are a number of different ways buyers can handle an appraisal gap that will allow the sale to go through:
Pay the difference
The most straightforward way to address an appraisal gap is for the buyer to pay the difference. This is not always an option financially, of course — some methods of payment are more realistic than others. If you have the …….