It is a market for sale across the country, and especially here in the Front Range of Colorado. Prices are rising, inventory is low, bidding battles are rampant and it is becoming increasingly difficult to buy a home. One factor influencing home buying in this seller’s market is a valuation gap. To better understand this term real estate and what it means to home buyers, we reached out to our seasoned mortgage loan officers at Elevations.
Why do you need an appraisal before buying a house?
An appraisal is a necessary part of the home buying process and affects the amount that you can borrow from your lender in the form of a mortgage loan. Your home loan is based on the market value estimate of the home. The appraisal determines this market value on the basis of data, comparable objects that were selected within a certain time frame and subject area in order to confirm the value of the property. The process is to prevent your lender from lending you more than is necessary to buy the home.
What if the rating is lower than my offer?
Your mortgage loan is based on the loan-to-value (LTV) agreed in the proposed contract. The LTV compares the loan amount you get to the value of the home. If the appraisal for a home you want to buy is below the home price, you may need to put more money on the table when you close to make up the difference. This is known as the valuation gap.
Valuation gap explained
A valuation gap is a discrepancy that occurs when your offer to buy a property is higher than the property’s appraised value. This is a common problem for buyers in competitive seller markets. If there is a valuation gap, you (the buyer) agree to put a cash difference on the table upon completion and indicate how much you are willing to go to fill that gap in your offering. This can show the seller that you are a determined buyer and how they believe the home is worth more than its appraisal.
For example, let’s say you buy a home for $ 460,000 and your real estate agent includes a valuation gap guarantee clause in your listing that says you will pay up to $ 10,000 above the appraised value of the home. If the valuation is $ 450,000, close the $ 10,000 valuation gap difference.
Rating gaps in Colorado
Property in Colorado under $ 750,000 is the most competitive home buying market and is where valuation gaps are the most common. Valuation gaps are usually between 5-10% of the contract price, but can also be more.
Prepare to buy a home
Questions about how a valuation gap in this competitive market would fit into your home purchase budget? You can schedule a no-obligation meeting by phone, in person, or virtually with one of our experienced Elevations Mortgage Loan Officers who work across the Front Range. Our team can help you understand your home buying options, learn more about the market, and create a plan that fits your financial goals.