Today, we're talking about a strategy on winning the appraisal gap.
What is an appraisal gap? An appraisal gap occurs when (we're seeing this especially in today's market) a home comes on the market and multiple offers are driving the price above the list price.
But, what if the appraised value doesn't support that higher price? Well, we as a lender can only look at the lower of the two numbers, and in this case, the lower number is the appraised value. So, how do we make up the difference?
The buyer has to come in with the difference, between the appraised value and the agreed upon price.
Let's use an example:
Let's assume a home is listed for $360,000. We get multiple offers, and the price gets driven all the way up to $400,000. You really want this house, and you're willing to invest $80,000 as a down payment. The problem is, as a lender, we're only going to recognize $360,000, which is the appraised value. So, of the $80,000 you were going to use, $40,000 of it has to go just to bridge the gap between the appraised value and the agreed upon price. That's the appraisal gap.
So, that leaves $40,000 for your down payment. Now, you may think this may not work, but there are solutions for this. One solution is to put more money down, so you still have a 20% down payment on your $360,000 appraised value, but that would take an extra $32,000. Instead, you can keep to your original $80,000 investment and have some mortgage insurance. You may be thinking, "I didn’t want to have mortgage insurance, that's why I wanted to put 20% down". Actually, depending on your scenario, the cost of mortgage insurance may be much less than what you think. We've put together an analysis showing two such options, which you can watch here.
Using this strategy, you can go into a competitive bid situation with confidence knowing that you can go above the list price and potentially not having to invest any more down payment than you originally planned. If you have a specific scenario you'd like to review with us, or if you have more questions about winning the appraisal gap, just give us a call!