In a competitive market, buyers sometimes offer more than a home may appraise for. When the appraisal comes in below the purchase price, the difference is called an appraisal gap. Understanding what an appraisal gap is — and your options when one happens — can help you protect your money and your deal.
The short answer: an appraisal gap is the difference between the home's appraised value and the agreed purchase price. A low appraisal can affect your loan amount, and your options usually include renegotiating, covering the gap with cash, or, in some cases, walking away. See our guide on earnest money for how your deposit may be protected.
What is an appraisal gap?
An appraisal is an estimate of a home's value performed by a licensed appraiser. Lenders use the appraisal to confirm the home is worth enough to secure the loan. When the appraised value is lower than the purchase price, the difference is the appraisal gap.
For example, if you agree to buy a home for $400,000 and it appraises for $385,000, the appraisal gap is $15,000.
Appraised value vs. purchase price
The purchase price is what you and the seller agreed to. The appraised value is the appraiser's independent opinion of what the home is worth, based on recent comparable sales, the home's condition and the local market.
Lenders base the loan amount on the appraised value or the purchase price, whichever is lower. So if the appraisal comes in low, your loan may be based on the lower number, which means you may need to bring more cash to closing.
What a low appraisal means for your financing
Most loans are based on a loan-to-value ratio. If the value drops, the loan amount may drop too, even though the purchase price did not change. That can leave you with a gap to cover.
For example, if you planned to put 20 percent down on a $400,000 home ($80,000) and the appraisal comes in at $385,000, the lender may base the loan on $385,000. Your required down payment may rise, and you may need to cover the appraisal gap in cash.
Your options after a low appraisal
If the appraisal comes in low, you generally have a few options:
- Renegotiate the price: ask the seller to lower the price to the appraised value.
- Meet in the middle: split the gap with the seller — you pay some, they reduce the price some.
- Cover the gap in cash: pay the difference yourself if you can afford it and still feel good about the price.
- Dispute the appraisal: if you believe the appraiser missed comparable sales, your lender may be able to request a review (not guaranteed).
- Walk away: if you have an appraisal contingency and cannot reach an agreement, you may be able to cancel and recover your earnest money.
Potential financial risks
Covering an appraisal gap means bringing more cash to closing. That can:
- Reduce your savings and reserves
- Increase your loan-to-value ratio if you do not cover the full gap
- Affect your mortgage insurance costs on some loans
Before you agree to cover a gap, think about whether the higher price still makes sense for you and whether you can comfortably afford the extra cash.
How to prepare for a possible appraisal gap
- Include an appraisal contingency in your offer if you want protection.
- Know your maximum cash-to-close before you make an offer.
- Talk with your loan officer about how a low appraisal would affect your loan.
- Keep reserves in case you need to cover a gap.
- Understand your contract deadlines so you do not lose your contingency.
Frequently asked questions
Can I cancel the deal if the appraisal is low? If you have an appraisal contingency and the appraisal comes in below the purchase price, you may be able to cancel and recover your earnest money, depending on your contract and deadlines.
Do I have to cover the appraisal gap? No. You can try to renegotiate, split the gap, or walk away (if your contract allows). Covering the gap is a choice, not a requirement, unless you agreed to it in your contract.
Can the appraisal be changed? Sometimes. If there are comparable sales the appraiser missed, your lender may request a review. It is not guaranteed, and the appraiser may stand by the original value.
Who pays for the appraisal? The buyer usually pays for the appraisal as part of the loan process. Ask your lender how it is billed.
Ready to make a confident offer?
When you are ready, get a free quote or get pre-approved with Alex.
You can also call Alex Al-Ammar at (313) 992-9898 or email Alex@vestalending.com.
This article is for general information only. It is not legal, tax or financial advice. Appraisal and contract rules vary by jurisdiction. Speak with a qualified real estate professional or attorney about your individual situation.
