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Appraisal Gap: How Home Buyers Can Deal With a Low Appraisal

An appraisal gap occurs when the home value appraises for less than the agreed-upon offer price. You can pay the difference or renegotiate.

Robin Rothstein
Chris Jennings
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Sometimes during the homebuying process a mortgage lender's appraiser says a house is worth less than the price the buyer and the seller agreed on. This is known as an appraisal gap or a low appraisal. You may have to pay the difference in cash or renegotiate with the seller to keep the deal alive.
An appraisal gap resulting from a low appraisal can happen under any market conditions. It's more likely to occur while home prices are rising rapidly, but it can happen even when home values are falling.
» MORE: How a home appraisal works

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Example of an appraisal gap

The appraisal is important because your loan amount is based on the home’s appraised value.
Let’s say the property appraises for $300,000 and the loan requires a 5% down payment. The maximum loan size will then be 95% of the appraised value, or $285,000.
But suppose you made an offer of $330,000 for a house that appraises for $300,000? The lender will advance you only the $285,000 based on the $300,000 appraisal. That's $45,000 less than your contracted $330,000 sales price — and you'll have to bring every penny of that amount to closing.
Appraised value
$300,000
Offer price
$330,000
Loan amount
$285,000
Difference between price and loan amount
$45,000
This situation can be stressful if you expected to make a 5% down payment of $15,000, only to find out that you'll have to scrounge up another $30,000 because of the low appraisal.
The good news: You have several paths forward.
» MORE: When you’re concerned bias is affecting an appraisal

How to deal with a low appraisal

When facing an appraisal gap, you have several options. However, the problem with some of these approaches is that they take time. An impatient seller might throw out your offer and accept another.
🤓 Nerdy Tip
Some real estate agents reserve the term "appraisal gap" to refer to an appraisal gap coverage clause in the purchase contract. When referring to the difference between the appraised value and offer price, they may prefer the term "low appraisal."

Renegotiate with the seller

When the purchase contract has an appraisal contingency and the appraisal is low, you can try negotiating with the seller to reduce the price. You can ask the seller to cut the price to the appraised value or to split the difference. The seller may agree, or make a counteroffer, or turn down your offer and accept the next-best offer.

Request an appraisal review or submit an appeal

You can request a review of the appraisal if you find inaccuracies in the appraiser's report. Alternatively, you can submit an appeal known as a reconsideration of value (ROV). However, consult with your real estate agent first about whether this is worth exploring, as winning an ROV can be a challenge.

Apply with a different lender

Another strategy you could try is applying for a mortgage with another lender and hope the appraiser it hires will provide a more favorable result. However this is one of those strategies that takes time, and, in the end, you could still see a similar appraisal outcome.

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Pay the difference in cash

If the seller won't reduce the price, it’s going to take a bigger down payment than perhaps you had expected — enough to cover the difference between the appraised value and the price.
A larger down payment would be necessary because mortgage lenders won’t let you borrow more than the home is worth.
Another scenario could be that you reallocate part of your down payment to cover the price difference, but if doing this puts your down payment below 20%, you’ll need to pay private mortgage insurance (PMI) and your lender may revise your terms.

Walk away

If you negotiated an appraisal contingency in your purchase agreement, the wisest move may be to walk away. If you made an earnest money deposit, you may also be able to recover those funds.
However, if you don’t have an appraisal contingency, you’ll likely have to forfeit any deposit and the seller may even take legal action. If this is your last resort, it still may be the best move in the long run if you can avoid overpaying for a house.

Appraisal gap coverage limits your exposure

A typical home purchase contract has an appraisal contingency: wording that says the buyer can call off the deal if the property appraises for lower than the buyer offered. But in hot real estate markets, where buyers outnumber sellers, some buyers waive the appraisal contingency. These buyers either pay cash for the home or gamble that they have money to pay the difference between the appraised value and the price, however much that may be.
There’s another option: an appraisal gap coverage clause. Rather than having a walk-away appraisal contingency or none at all, your agent can write a clause in the purchase contract that says you will pay the difference between the appraised value and the contract price, up to an amount that you choose.
Let’s say, for example, there’s a $30,000 difference between the contracted purchase price and the appraised value:
  • If you had offered to cover an appraisal gap up to $30,000, you would proceed with the purchase.
  • But if you had offered to cover an appraisal gap up to only $20,000, you would be entitled to withdraw your offer and get your deposit back. That's because the difference between the purchase price and appraised value is $10,000 higher than what’s stated in your appraisal gap coverage clause.

Don't let appraisal concerns derail your offer strategy

Keep in mind that, at the end of the day, your offer needs to be believable — especially if there’s a bidding war on the property. In this situation, you're more likely to succeed if you include financial documentation with the offer.
Coming armed with a preapproval letter and proof of funds that you can cover an appraisal gap will go a long way to help your offer stand out from competing offers without documentation.
» MORE: Responding to a low refi appraisal

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New American Funding

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Min. credit score

N/A

Min. down payment

0%

GO Mortgage

on GO Mortgage

GO Mortgage

4.0

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