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Posts Tagged ‘appraisal’

What is An Appraisal Gap and Appraisal Gap Coverage Clause?

An appraisal gap is the difference between the fair market value determined by the appraiser and the amount you agreed to pay for the home.
An abnormally high number of homes across the United States are being appraised below their agreed-upon sales prices, causing some deals to implode.With home prices soaring in recent months, buyers often pay above asking price to win bidding wars. As a result, CoreLogic estimated that about 13% of appraisals came in below the contract price in August.
A home appraisal is an evaluation and report performed by a licensed appraiser to determine a home’s fair market value. Lenders require a home appraisal to ensure the amount you agreed to pay for the home is equal to or less than the appraised value. To create a home appraisal, appraisers normally rely on factors like data from recent closed and pending sales. But since sales usually close a month or two after going under contract, rapidly increasing home values can sometimes skew appraisals that rely on home values recorded months earlier.
In today’s hot market, many prospective buyers will get into bidding wars and possibly waive the appraisal contingency or offer an appraisal guarantee up to a certain amount. In both cases, the buyer would have to come up with the difference in cash between the appraisal and the sale price, or their appraisal guarantee and the sale price.
The disparity underscores the risks buyers face in the current market, especially those stretching their dollars to win a bidding war. Mortgage lenders will typically offer only enough to cover the appraised value of a home, forcing buyers to either provide the balance, renegotiate, or terminate the deal if an appraisal comes in below the contract price.
Using An Appraisal Gap Coverage Clause:
If you want your bid to outshine the others, an appraisal gap coverage clause may be necessary. An “appraisal gap clause” is used in a sales contract to guarantee that the home buyer will cover the monetary gap between the appraisal and the sales contract if an appraisal gap becomes an issue.
The clause states how much of an appraisal gap you’re willing to cover. Since there’s no guarantee an appraisal will match the agreed-upon sales price, it’s often something sellers look for to know the offer will still stand even if the appraisal comes in a little low.
The main thing that needs to be noted is the monetary value of your appraisal gap guarantee. It’s not wise to state that you will cover an unlimited amount between the sales price and the appraised value. I recommend always putting in the maximum amount that you are willing to cover.
What Should You Do When The Appraisal Is Less Than The Offer?
You have several options when the appraisal is less than the offer including walking away from the sale, but that doesn’t work in every situation.
Here’s what to consider:
Pay The Difference
If the seller won’t negotiate to lower the purchase price, you’ll be on the hook to pay the difference unless you have an appraisal contingency in your contract. The appraisal contingency gives you a way out of the contract without losing your deposit. Without it, you must buy the home or risk losing your the money you have already put down into escrow.
Without a lower sales price, you’ll have to pay more for the home. Since lenders base your loan amount on the appraised value, you’ll need your agreed-upon down payment plus the difference between the sales price and appraised value.
What if you don’t have the cash?
Ask for gift letters from family members or leverage your investments. You may be able to use some retirement funds without paying a penalty. Talk to your 401(k) administrator or tax advisor to see what options you have. If you own other real estate, consider tapping into the equity and using the funds to cover the appraisal gap.
Renegotiate The Offer     
If you have an appraisal contingency on your sales contract, you may be able to work with the seller. Start by requesting the seller to lower the price to the appraised value. This would eliminate the appraisal gap and your financial issues in buying the home.
Asking the seller to renegotiate can be risky in a seller’s market, so be careful. If the seller has a kick out clause, they could accept another offer that comes through. They still must give you the time to remove your appraisal contingency and seal the deal, but they can choose the other offer if you don’t.
Dispute The Appraisal
You can dispute the appraisal, asking for a reconsideration of value. However, this is not easy to do as you’ll need plenty of evidence to prove the appraisal is inaccurate.
You must prove one of the following:
  • The appraiser didn’t use appropriate comparable sales, and you have proof of more accurate options
  • The appraiser missed features or upgrades in the subject property
  • You found mistakes in the report
  • The appraiser only conducted a drive-by or exterior appraisal
Walk Away from the Sale
It’s not the most pleasant choice, but if you’re worried about paying more than a property is worth, sometimes walking away from the sale is the best option. If you’ve unsuccessfully renegotiated with the seller and disputed the appraisal to no avail, it may be best to look for another property.
Before you do this, talk to your attorney. If you didn’t include an appraisal contingency in your contract, you might risk your deposit. Sometimes other contingencies still help, though, especially a mortgage financing contingency.

Common Fees When Buying A Home

When buying a home, most people focus on how much the home costs and what interest rate they can get on the loan. While understanding the lending process is very important, the other fees that home buyers overlook when it comes to their home purchase.

There are some fees that will require up-front payment. Other fees may be rolled into the loan for your home. It’s important to understand the difference and know what you’ll be expected to pay.

Earnest Money Deposit

To prove you’re “earnest” in your purchase commitment, a buyer can expect to deposit to a trust account 1% to 2% of the total purchase price as an earnest money deposit within days of entering into a contract.This amount can change depending on market factors. If demand in your area is high, a seller could expect a larger deposit. If the market is cold, a seller could be happy with less than 1%.

Other governing factors like state limitations and rules can cap how much earnest money a seller can ask for.

Escrow account

An escrow account is basically a way for your mortgage company to make sure you have enough money to cover related taxes, insurance and possibly mortgage insurance. The amount you need to pay varies by location, lender, and loan type. It could cover costs for a few months to a year.

If you only provide a small down payment, you may be required to purchase private mortgage insurance. Private mortgage insurance, commonly referred to as PMI, is typically provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults.

Sometimes this means you are required to pay a full year’s worth at time of purchase, or it will be rolled into your monthly payment.

Escrow accounts are common for loans with less than a 20% down payment and mandatory for FHA loans, but it’s not required for VA loans.

Origination Fees & Points

The origination fee is the price you pay the loan officer or broker for completing the loan, and it includes underwriting, originating, and processing costs.

The origination fee is a small percentage of the total loan. A typical origination fee is about 1%, but it can vary. You should shop lenders for more than interest rate, but all of the fees associated with the loan.

Inspections

You want to be assured your new home is structurally sound and free of defects before you complete the purchase. Those assurances come with a price.

  • Home inspection: This is critical for homebuyers. A good inspector will be able to notify you of structural problems, defective applianes, leaks, and other potentially serious problems. Expect to pay $300 to $800 for a home inspection, although cost varies by location and the size of the home and how many stories it is.
  • Radon inspection: An EPA-recommended step, this inspection will determine whether your prospective home has elevated levels of the cancer-causing agent radon. A professional radon inspection can cost several hundred dollars.
  • Pest inspections: Roaches are one thing. Termites or wood fungus are a whole different story. Expect to pay up to $150 for a Wood Destroying Organism inspection.

Attorney

Some states, such as North Carolina, require an attorney to be present at closing. In other states, such as Florida, this is optional. If you use a lawyer, expect to cover the costs, which vary by area and lawyer and what the attorney is being asked to do.

Credit check

Just because you can get your credit report for free doesn’t mean your lender can (and they will actually pull all three). You have to reimburse the lender, usually around for these reports that usually run about $30.

Insurance

If you live in a hazard-prone area, you might need to purchase extra insurance in addition to homeowners insurance, these can include wind and flood. Lenders will require that you purchase the required insurance to protect their investment. If you are a cash buyer, you have the option of buying insurance or self-insuring. Make sure you understand the risks.

Appraisal

Your lender will not approve a loan for a home without knowing what its fair market value is. They will determine this value based on an appraisal.  Appraisal costs vary by market area and the size and complexity of the property. An appraisal will typically cost $250 to $1000.

 

Title Insurance

Title insurance covers you in the unlikely case that the person who sold you the house didn’t actually own it or if information on the title was false. Typically this is verified before the purchase of your home, but this insurance protects the lender or the buyer against loss arising from disputes over ownership of a property.

The lender will require you to have title insurance for the value of the loan. You are also required to have title insurance on the value of the property. Whether the buyer or seller pays for this is area specific and is a protocol not a mandate and can be negotiated as a condition of the contract.

Survey

A survey is not required in all instances, but your lender may require a professional surveyor to determine exactly where your property lines are drawn. Your attorney will also review the survey to ensure that there are no encroachments. Prices vary widely, but expect to pay at least $100.

Document preparation fees:

The lender, broker, Title Company or closing attorney will usually have a fee to cover the preparation of the required documents for the loan and closing paperwork. These fees are typically rolled in closing costs for the home and may be covered by either the homebuyer or seller.

 

State Recording Fees:

Depending on where you live, there may be a fee required for recording and holding the information regarding the sale.