- A valuation gap occurs when a home is appraised for less than the price you offered.
- Valuation discrepancies can increase your personal expenses or even force you to forego a purchase.
- Including a valuation gap guarantee with your offer can help avoid losing a home due to valuation issues.
is an integral part of the home buying process. But if a home’s appraised value is lower than the price you’ve offered, it can complicate things with your mortgage financing.
However, a valuation discrepancy does not necessarily mean that you will have to cancel the purchase. There are ways around this problem.
What is a valuation difference?
won’t lend you more money than a house is worth. So when you make an offer, your lender orders an appraisal of the home to verify its value. If the appraiser determines that the property is not worth what you offered, you have a problem.
“When an appraisal is low, there’s what’s called a valuation gap – or the difference between the agreed-upon purchase price and the appraised value,” says Bill Gassett, real estate agent at RE/MAX and founder of Maximum real estate exposure. “When a buyer is not financially able to fill the gap, the sale may fail.”
Fortunately, there are several ways to keep the deal alive – and even proactively prevent a valuation discrepancy from derailing your purchase.
How the Home Appraisal Process Works
Lenders order home appraisals to protect themselves if you are unable to repay your loan. For example, if you stopped making payments, they could foreclose, sell the property, and be more likely to raise enough cash to cover your overdue loan balance.
During the appraisal, a real estate professional will inspect the property and assess its current market value. To do this, they will consider the cost of rebuilding or replacing, the value of comparable recent homes sold in the area, and any earning capacity of the property. They will also usually do a physical assessment of the home.
There are several reasons why an appraisal may be lower than what you offered. Home values in the area may have fallen recently, or the appraiser may have discovered flaws in the home or determined that it needs improvements. There is also the possibility that you are simply offering too much for the property, perhaps to beat other buyers or win a bidding war.
As Gassett explains, “one of the downsides of a bidding war is the increased possibility of a house not valuing at the agreed price.”
What is a valuation difference guarantee?
Including a valuation gap guarantee – also known as a valuation gap clause – in your offer can prevent valuation issues from hurting your purchase. They can also give you a head start when bidding on properties.
“It puts in writing the intention of a buyer to cover the difference between the purchase offer and the figure calculated by the expert, up to a certain amount”, explains Tabitha Mazzara, director of operations at the lender mortgage. MBANC. “It’s the buyer’s promise that if the appraisal is lower than their offer, they will return money to the seller to cover funds above the amount the mortgage company would lend on the property.”
Sellers like valuation gap guarantees because they reduce the risk of a bid failing due to valuation issues. As a homebuyer, you can include a valuation gap guarantee to give sellers more confidence in your offer or to help it stand out from other buyers. On the downside, it does mean that you could potentially incur additional fees if the rating is low.
“In a hot real estate market where bidding wars are common, a buyer with a valuation gap guarantee written into the offer will be more attractive to the seller than one without that flexibility,” Mazzara said. . “It could be the difference between getting the house or not.”
3 other ways to deal with a valuation gap
Covering a valuation gap out of pocket is just one way to manage a low valuation. You might also be able to:
You can try to negotiate with the seller and ask them to accept the lower appraised value of the house instead of your original offer. You might also consider asking them to meet you somewhere in the middle, covering you for some of the valuation gap and the seller also agreeing to a price slightly lower than your original offer.
2. Challenge the assessment
If you and your agent think the appraised value is inaccurate, you can dispute it with your lender. To do this, you must write a letter to your lender and include evidence explaining why the appraisal is wrong. Perhaps the appraiser missed features of the home or you found errors in their report. You will also want to include recent, comparable sales that support the value of the property you feel is more accurate.
3. Withdraw from the contract
It’s not ideal, but if you can’t come to an agreement with the seller, a new appraisal won’t support a higher value, and you can’t close the appraisal gap out of pocket, you may need to walk away from the transaction. Keep in mind that this is only possible without penalty if you have included an appraisal contingency in your contract. These allow you to opt out of the deal if the home is not valued for what you are offering.
The bottom line
Valuation gaps can hurt your home buying goals, but there are ways to manage them. If the above strategies fail, Mazzara says, “it’s time to get creative.”
“The buyer can waive the inspection, pre-secure the mortgage, close earlier or later at the seller’s desire, or offer the seller a sale-leaseback,” she says.
Just be sure to talk to your agent about these options before moving forward.