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Will an appraisal gap force you to cancel your closing? 

On Behalf of | Aug 12, 2022 | Real Estate Closing |

The real estate market is in constant flux. Prices, trends and demand are always changing, and the professionals that operate within the industry have systems in place to minimize the losses they may possibly incur from doing business. 

Mortgage companies, for example, require numerous different forms of paperwork to help validate that they won’t overextend themselves on a transaction or fall victims to elaborate fraud. They verify the ability of the customer to repay the loan and the value of the property. 

One of the ways that lenders protect themselves is through appraisal requirements. They want a neutral professional to place an accurate fair market value on the property so that they can determine if the amount the buyer wants to finance is appropriate. When the appraiser sets a value that is below the set purchase price, the transaction now has an appraisal gap that could prevent it from closing. How can you respond to an unexpected appraisal gap? 

Different scenarios may allow for different solutions

Appraisal gaps can complicate closings, but they don’t necessarily have to ruin a deal. Some buyers will have enough capital available to them to make up the difference between what their lender will fund for them and the offer they made to the seller. When the market has started to soften, sellers might agree to meet the buyer in the middle by reducing the sale price of the property. 

Occasionally, buyers can reach an agreement with their lender to work around the gap, although it may be an easier solution to apply for financing at a different company and hope that the next appraisal comes in higher. An appraisal gap almost always means complications for prospective home buyers and sellers who are eager to move on from property there where they no longer live. 

Buyers can protect themselves against the possibility of an appraisal gap by looking at properties priced low enough to allow them to offset any drop in local values. Sellers may want to consider the potential of an appraisal gap when setting their asking price, as unrealistically high asking prices may lead to willing buyers but no lenders who will finance the transaction. 

Identifying issues that can derail your upcoming real estate closing can help you make it to the table without any major conflicts.