Lenders require an appraisal to ensure the property is worth at least the loan amount, since the property serves as collateral. If the appraisal comes in below the purchase price, the lender will only approve a loan based on the lower appraised value, creating a gap the buyer must cover. With an appraisal contingency, the buyer can renegotiate the price, pay the difference in cash, or cancel the contract.
A buyer agrees to purchase a home for $400,000 with an appraisal contingency. The appraiser values the property at $380,000, creating a $20,000 gap. The buyer asks the seller to reduce the price to $380,000. The seller agrees to meet in the middle at $390,000, and the buyer brings an additional $10,000 in cash to closing.
The exam loves appraisal gap scenarios. Know that the appraised value affects the loan-to-value ratio, and lenders will base the loan on the lower of the purchase price or appraised value. If the buyer waives the appraisal contingency, they must make up any shortfall in cash or risk losing their earnest money.
Related Terms
Related Concepts
A purchase agreement is a legally binding contract between a buyer and seller that outlines the terms and conditions for the sale of real property. It is also commonly called a sales contract, purchase and sale agreement, or earnest money agreement.
Offer and acceptance is the process by which one party proposes specific terms for a contract and the other party agrees to those exact terms, creating mutual assent. This mutual agreement, also called a meeting of the minds, is an essential element of every valid contract.
A counteroffer is a response to an original offer that changes one or more terms of the offer, effectively rejecting the original offer and creating a new offer. The party who makes the counteroffer becomes the new offeror.
Consideration is something of value exchanged between parties to a contract, making the agreement legally binding. It can be money, a promise to act, a promise to refrain from acting, or anything else of value.
Earnest money is a deposit made by the buyer at the time of the offer or shortly after to demonstrate good faith and serious intent to purchase the property. It is also called a good faith deposit.
Frequently Asked Questions
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