What is Appraisal Gap Coverage?

An appraisal gap can be an obstacle when you’ve found the home of your dreams, especially in a vicious seller’s market. In this blog, learn what appraisal gap coverage is how it can seal the deal when buying a home.

What is Appraisal Gap Coverage?

When a home is under contract, it will undergo a home appraisal. An appraisal ensures that the property’s market value lines up with its list price and that the mortgage amount the buyer is seeking is within an acceptable range. Lenders will generally approve a loan-to-value (LTV) of 80% or less, but this is not a hard and fast rule. When the home is appraised lower than the list price, the LTV increases. If the appraiser determines the home is worth less than the purchase price, there will be a price difference that needs to be paid. This difference could put the sale in jeopardy. While negotiating the price with the seller can work in some scenarios, it may be more difficult to do if the property has multiple offers. Appraisal gaps tend to be more of an issue when you’re in a market with more buyers than available homes.

For example, if a seller agrees to your competitive offer of $410,000 on the home listed at $400,000 but it appraises for $390,000, there will be an appraisal gap of $20,000. To avoid this discrepancy, you could make an offer of $410,000 + $10,000 in appraisal gap coverage.

Appraisal price gap coverage is extra cash the buyer offers the seller to minimize that disparity, guaranteeing they’ll pay the sale price plus a specified amount not covered by the appraisal.

Is it Right for Me?

Having appraisal gap coverage can be beneficial if you’re buying in a seller’s market, as it can cushion you from unforeseen changes and make your offer stronger and more secure. You should know that gap coverage is not the same as a down payment or closing costs—it’s just additional cash that is tacked on to your offer price. Since you won’t know if you need to pay the difference until the appraisal is finished, you may find you won’t need it after all. Be sure to take your budget into consideration before you commit to gap coverage. Your real estate agent is also a great resource for advice since they’re familiar with local housing trends.

Every housing market has periods of shifting supply and demand levels, and sometimes you have to act accordingly to win the house you want. Factoring in appraisal gap coverage during a seller’s market could save you headache and heartache during your homebuying journey.

If you have any questions about appraisal gap coverage, contact a local real estate agent. If you aren’t already working with an agent, contact one of our licensed Mortgage Loan Originators who can help you find one. If you are ready to begin t­­he home buying process, click here to get started!

NFM Lending is not affiliated with any real estate companies. You are entitled to shop around for the best lender/real estate company for you. The real estate agent is not a mortgage lender. Contact NFM Lending directly to learn more about their mortgage programs and your eligibility for such programs.

These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.