Understanding what home appraisals are and why they’re important.
What are appraisals, and how do they affect the buying process? Cash buyers don’t need to worry about this, but when you get financing, the bank or lender will order an appraisal. An appraiser is an unbiased third party who comes in and gives their opinion on the home’s value.
For instance, let’s say you offer $125,000 on a house. We immediately move to the next step if the appraiser says it’s worth that amount. However, if the appraiser says the home is only worth $110,000, we have to renegotiate the contract because a bank or lender won’t lend you more money than the home is worth. That’s why both the home and your contract must be priced correctly.
When the appraiser says the home is worth less than the offer, the difference is called an appraisal gap. In the previous example, the appraisal gap would be $15,000, and there are a few ways to handle this. Either the buyer has the extra money and can pay the difference, the seller reduces the price, or the two parties split the difference.
There’s even a possibility that the mortgage insurance on your loan will cover the gap, so that’s something to explore if you’re ever in this situation. The worst-case scenario is that the appraisal comes back low, and the seller refuses to budge or work with you.
Stay tuned for the next video when we will dive deeper into abstracting. If you have any questions, please feel free to reach out to me by phone or email.