September 2020 Journal: Managing Appraisal Gaps in Marysville

Right now, we are in the thick of a historic housing market. Mortgage rates have dropped to some of the lowest levels we have ever seen, and the search for homes is incredibly competitive. Buyers are regularly waiving contingencies, writing escalation clauses, and going up against all-cash offers just to get their foot in the door.

This intense competition means purchase prices are often flying past the actual appraised values. When you offer more than a home is worth, you run directly into an appraisal gap. If you want to keep the deal alive, you have to find a way to cover that difference out of pocket.

Understanding the Appraisal Gap Challenge

Lenders calculate your loan-to-value ratio based on the lower of the purchase price or the appraised value. During a major market surge, home prices rise much faster than historical sales data can keep up with. When the appraisal comes in lower than your agreed-upon purchase price, the lender will not simply increase your loan amount to match your bid.

That is where the gap comes in. If you agreed to pay a certain price but the appraiser says the home is worth less, you are responsible for making up the difference. You can find up-to-date tracking of these shifts in our archive of Snohomish County market updates, which documents how local buyers have had to adapt to these bidding wars.

The Reality of Buying in Marysville

Over in Marysville, this trend is hitting buyers hard. We have a mix of suburban neighborhoods closer to Interstate 5 and more rural properties as you head east toward the foothills. Because of this geographic spread, buyers looking across Snohomish County often look to Marysville for more space. But with so few homes on the market, almost every single listing is seeing multiple offers.

For homes on the outskirts of town, many buyers want to use government-backed USDA loans because they offer zero down payment. This program is fantastic for rural parts of the county, but it comes with strict appraisal guidelines. If you are using a zero-down loan and face an appraisal gap, you cannot just roll that extra cost into the mortgage. You have to bring that cash to the closing table.

How to Cover the Shortfall

If you find yourself facing an appraisal gap, you do have options. You do not necessarily have to walk away from the home of your dreams, but you do need a solid financial plan. Here are the most common strategies my clients are using to bridge the gap and keep their purchase on track:

To see how changing your down payment or loan structure affects your monthly obligation, you can run different scenarios through our mortgage payment calculators. It helps to see the math in black and white before you make an offer.

• Bring extra cash to closing to pay the difference directly.
• Renegotiate with the seller to meet in the middle or drop the price to the appraised value.
• Shift your loan structure, such as putting less money down on your primary loan and using those saved funds to cover the gap.
• Ask family members for a financial gift to help cover the cash shortfall.
• Dispute the appraisal if you and your real estate agent can find better, more recent comparable sales in the neighborhood.

USDA Guidelines and Low Appraisals

USDA loans require the property to meet specific safety and soundness standards, and the valuation must support the purchase price. Since these loans are designed for rural and suburban fringe areas, finding recent comparable sales can sometimes be tough for appraisers. This can lead to conservative valuations that do not quite match the frantic bidding prices we see on the ground.

If you use a USDA mortgage, you must plan ahead. If an appraisal gap occurs, you must prove you have the liquid assets to cover the difference yourself, as the program will not lend more than the appraised market value. Knowing these rules before you write an offer is the best way to prevent your earnest money from being put at risk.

My take, looking back

Looking back at this stretch of 2020, the energy in the mortgage industry was absolutely electric. I was constantly on the phone at nine o'clock at night writing pre-approval letters because properties were hitting the market and selling within forty-eight hours. At the same time, we had a massive wave of homeowners refinancings to save hundreds of dollars a month on their existing payments. It was a wild, non-stop pace.

The hardest part of my job during this boom was keeping people calm. It was easy for buyers to get caught up in the excitement and want to throw away every single contingency, safety net, and protection they had just to win a house. When you are making one of the biggest financial decisions of your life, you need a steady hand to help you balance your desire for the home with your long-term financial safety.

Questions I get about this

Can I use a personal loan to cover an appraisal gap?

Generally, no. Taking out new debt right before you close on a home can completely throw off your debt-to-income ratio and jeopardize your mortgage approval. Lenders require you to source any funds used for the purchase, and unsecured personal loans are typically not allowed as a source for your down payment or appraisal gap coverage.

What happens if the seller refuses to lower the price after a low appraisal?

If the seller will not budge and you do not have the cash to cover the gap, the transaction will likely fall apart. This is why having an appraisal contingency in your contract is so important. It protects your earnest money deposit and allows you to walk away safely if the home does not appraise and you cannot reach an agreement.

Talk it through with me

If you are trying to make sense of this wild market or want to map out your homebuying strategy, let me help you prepare. You can reach out directly through my loan officer contact page to get started. We can go through a pre-approval that takes roughly five minutes, and our team currently maintains an average closing time of fifteen days or less.