Buying a home is a lengthy process that takes weeks, if not months, to complete. Buyers looking at residential properties in Hawaii may have to tour multiple homes before they find one that truly suits their needs.
After making an offer and negotiating terms with the seller, many other steps are necessary before the actual closing occurs. The home usually needs to undergo an inspection and an appraisal. The buyer has to finalize their mortgage, and everyone has to sign certain documents.
In some cases, the appraisal may come back at a lower amount than the purchase price offered for the property. The resulting appraisal gap can complicate the pending home closing.
Appraisal gaps affect financing
Mortgage lenders require appraisals for their protection. An appraisal helps validate the amount offered for the property and protect the mortgage lender from a scenario in which they cannot recoup the amount paid for the property in a foreclosure scenario.
An appraisal gap means the lender is at risk of excessive financial exposure. Lenders may refuse to finalize mortgages for pre-approved amounts if the price offered is significantly above the appraised value of the home. In some cases, the lender may refuse to finance the transaction entirely. Other times, they may limit the financing to no more than the appraised value of the home.
In either scenario, the aspiring buyers may need to renegotiate with the seller. In some cases, sellers may agree to a lower price to move forward with the transaction as planned. If they do not compromise with the buyer, then the buyers may need to look into alternate means of securing the additional capital necessary to complete the transaction.
Other times, the buyer may need to walk away from the property. Conflict can ensue in such scenarios, especially if the seller wants to retain some or all of the earnest money because of the inconvenience of relisting the home after the canceled closing.
Buyers generally need to understand the local market and include the right terms in their offers and purchase agreements to protect them in the event of an appraisal gap and other closing complications. Securing the right support while preparing for a real estate transaction can help people minimize their financial exposure and legal risk throughout a transaction process.