There are many important steps required to complete a real estate transaction between a seller accepting an offer and closing. Many of those steps exist for the protection of mortgage lenders.
It is common practice for banks and other lenders to require inspections and appraisals, as well as surveys, in certain circumstances. Buyers and sellers often assume that inspections and appraisals are just a technical part of the sale, but issues could lead to delays in closing or even a canceled transaction. A low appraisal might lead to a lender refusing to fund a mortgage.
Appraisal gaps represent lender risk
Lenders require appraisals to ensure that the amount they finance is appropriate, given the condition of the property and the local market. An appraisal gap occurs when the offered amount for the property is higher than the appraised value set by a licensed professional.
If there is an appraisal gap, the lender may refuse to finance anything above the appraised value of the property. That can then complicate the closing, as the buyer may have to scramble for alternate means of funding or attempt to renegotiate with the seller.
Buyers bidding aggressively on properties may need to reserve cash in case of an appraisal gap. They may also want to include contingencies in their offers that allow them to cancel the closing if they cannot secure financing after an appraisal comes in low.
Appraisal gaps are common when the housing market fluctuates or buyers bid aggressively on properties. Learning more about issues that can complicate residential real estate transactions can help buyers and sellers alike to make decisions that reflect their interests.