Appraisal Gap Coverage
An appraisal gap is the difference between the sales price offer and what value the appraiser (who works with the lender) has assigned the home. Knowing how to navigate this potential problem on the front end is critical. First, you need to know that not every situation has an appraisal gap. According to Fannie Mae in 2022, only 8 percent of appraisals come in lower than the sale price. However, having an agent who has a solid pulse on the market and has run an accurate comparable analysis will give you advice on whether your offer is more likely than not to run into this situation.
The seller of the home is looking for assurance in your offer that if in the event of an appraisal gap occurs, you have will commit (to some level) of coverage. Some offers will give a small commitment, some will give a large commitment, and some will give a full commitment. Knowing how much to commit to is an art and not a science, because if done right, the proper appraisal gap coverage can beat out higher offers and even cash offers.
Options
Complete appraisal gap coverage- You will pay, with cash at closing, the difference between the sales price and the appraised value.
Partial appraisal gap coverage- You will pay a predetermined amount of cash, at closing, for the difference between the sales price and the appraised value. You can do a percent, a specific amount of dollars, whatever you would like.
Non-commitment to any appraisal gap- You have predetermined in your offer that you will not pay with cash at closing for any difference in the sales price and the appraised value.