This week on the blog we discuss our advice for buying a home. Including a clause for appraisal gap coverage could help you buy a home in the Twin Cities.
1. What is an appraisal?
Most people need a loan in order to buy a house in the Twin Cities. Once your offer has been accepted on your dream house, your lender will order a professional appraisal to ensure the amount of money being borrowed is justified by the condition, location, and characteristics of the property.
The appraiser is an unbiased third-party that inspects both the interior and exterior of the home, researches similar homes in the area, and determines the fair market value of the Twin Cities home. Long story short, the bank's goal is to make sure the amount of money you will be borrowing is on-par with the value of the house. So what does this have to do with your offer?
2. What is an appraisal gap?
Due to current high demand in the Twin Cities housing market, many people are offering several thousand dollars over asking price in hopes of getting their offer accepted. You may have heard the current market being described as an “auction-like” environment, where the person with the highest offer price wins the house.
These "bidding wars" may lead to a gap between the purchase price of the house and the amount the bank is willing to loan you to buy the house. Let's dig into how you can make your offer on a Twin Cities house more competitive.
3. Creating a Competitive Offer
When buying a home in the Twin Cities, it’s important to know ways to make your offer more appealing than everyone else's. One way to make your offer slightly more competitive is to cover the price difference in the event of an appraisal gap. In today’s high demand market, buyers are offering to cover some or all of that difference versus renegotiating sales price or canceling the contract.
What this means to you is you may need to bring additional cash to close or change the calculated Loan-to-Value of your financing.
This is one of many parts of a competitive offer. Contact us today so we can discuss more ways to make your offer stand out and help you buy a home in the Twin Cities.
4. Finance Example
If you offered $400,000 with 80% financing and the home appraises for $395,000 there are two ways to manage the finances.
- You could finance 80% of the $395,000 value plus the $5,000 difference. This would result in a down payment of $84,000 vs $80,000. In this option, your monthly payment would be slightly lower as your loan size would be $316,000 vs $320,000.
- Keep the down payment at $80,000 and your Loan-to-Value would be 81% (vs 80%) resulting in needing to pay Private Mortgage Insurance (PMI) for a short period of time.
Working with a lender that is local, readily available, and can easily explain the nuances of lending can be very helpful in this "auction-like" environment. We have several trusted lenders we would love to connect you with.
Connect with us today to answer your questions about submitting a competitive offer. Your dream home awaits.
One of our Twin Cities realtors will be in touch as soon as possible.