What is a Home Appraisal and Why Do Lenders Require It?
A home appraisal is an unbiased professional opinion of a home’s value. In today’s market, a mortgage lender requires an appraisal to ensure the property’s value covers the loan amount. According to guidelines from Fannie Mae, this protects the lender from financing a property for more than it is worth.
What is an Appraisal Gap? Strategy for Home Buyers
What is an appraisal gap? An appraisal gap occurs when a home’s appraised value comes in lower than the agreed-upon purchase price in the sales contract. This discrepancy creates a “gap” in financing that the buyer must address to move forward with the mortgage and the purchase.
How to Cover an Appraisal Gap vs. Down Payment
It is important to understand the difference between appraisal gap vs. down payment funds. While your down payment is a percentage of the loan value, an appraisal gap is additional cash paid out-of-pocket. When learning how to cover an appraisal gap, buyers often use personal savings, gift funds, or negotiate a price reduction with the seller.
Worried about a low appraisal? Talk to a Denver expert today to build a winning real estate appraisal gap strategy.
Factors That Affect Home Appraisal Value
Appraisers look at several specific criteria to determine a property’s worth. These factors that affect home appraisal value include:
Location
Proximity to high-performing schools, local amenities, and the general desirability of the neighborhood.
Square Footage
The total livable space, including the number of bedrooms and bathrooms, compared to recent market comps.
Condition
The overall maintenance of the home, including the age of the roof, HVAC systems, and any recent structural upgrades.
Quick Home Appraisal Checklist for Buyers
- Review recent comparable sales (comps) in the immediate area.
- Identify unique features (e.g., solar panels, finished basements) that add value.
- Ensure all utilities are turned on for the appraiser’s visit.
- Prepare documentation for any major renovations completed in the last 5 years.
- Consult with your agent on low home appraisal options for buyers in case of a value discrepancy.
Options When Writing an Offer
In a competitive seller’s market, many buyers include an appraisal gap clause example in their contract. This tells the seller you are willing to pay a specific amount above the appraised value. This appraisal gap coverage makes your offer much more attractive in a bidding war. For more on this, see our guide on Denver Bidding War Strategies.
