What is an appraisal gap insurance clause? It is an important term to know when buying a home, particularly in a hot real estate market, for it ensures the seller that they will receive the total sum of the offer.
Here is how. If a buyer places an offer on a home that is above the amount of the lending institution’s appraisal of the house, the appraisal gap insurance clause states that the buyer will come up with the difference in cash at the time of closing. For example:
The buyer places a bid on a home for $550,000.
Lending institution appraisals home for $525,000.
There is an appraisal gap of $25,000.
The appraisal gap insurance clause will state that the buyer will come up with that gap sum of $25,000 at closing.
Buyers, please be aware that when you sign a gap insurance clause, you are forfeiting your right to object to the appraisal and risk losing your earnest money. So make sure when buying a home above the home appraisal estimate that you have abundant cash to cover that difference.