Recently, U.S. News & World Report brought up an issue that today’s home buyers should be aware of: the possibility of an appraisal gap. It can be a sticking point, even when everything else about a given home’s sale seems to be falling into place. The article opens with an understatement about today’s buyers: “many people are financing their home purchases.” That’s a considerable understatement. The percentages vary depending on who’s doing the measuring, but the U.S. Census Bureau tells us that just shy of 66% of all homeowners are currently making monthly payments on active mortgage accounts. Even that hefty percentage somewhat minimizes the ubiquity of home loans in today’s market: Census says that 87% of recent buyers are financing their home purchases.
Given today’s low mortgage interest rates, U.S. News is safe in opining that this top-heavy buyer choice embodies “a move that makes a lot of financial sense.” There can be a bump in the financing road, however—one that many buyers are unaware of until they encounter it: an appraisal gap. The gap is the difference between what a would-be home buyer has offered to pay versus the value the bank’s appraiser calculates. If the appraisal is greater than the offer, no problem: that gives the bank confidence that the amount it is being asked to advance is covered by the collateral value of the property. But if the offer was more than what the appraiser can justify using industry metrics, the bank will be unlikely to come up with the full amount it is asked to advance.
Here, it’s only fair to pause to offer an aside about the emotional toll appraisal gaps can provoke. Both buyer and seller are apt to feel a smoldering resentment about what seems a “low” appraisal. After all, isn’t the true market value, by definition, what the “market” is willing to pay—so isn’t that a known quantity—the precise amount that the buyer has offered? In truth, a dispassionate way to look at the situation is to include the bank in that determination: the market value is the figure the buyer and lender must agree upon.
Fortunately, an appraisal gap doesn’t necessarily derail a sale. For buyers whose offers are contingent on financing, the buyer can come up with the difference themselves, renegotiate in light of the lower appraised figure, or request a second appraisal from the bank (or go to a different bank). This fall, buyers are finding appraisals often reflect the recent hefty increases in values.