You agreed on a price, the lender ordered an appraisal, and the report came back lower than the contract. This is called an appraisal gap, and in a busy spring market it is one of the more common bumps between contract and closing. It is rarely fatal to a deal, but it does force a decision.
Why the gap matters
Lenders base the loan on the lower of the purchase price or the appraised value. If you planned to borrow a certain percentage of the price and the appraisal comes in below it, the lender will lend that percentage of the appraised value instead. The difference has to come from somewhere: a lower price, more cash from you, or some combination.
Why appraisals come in low
- Prices rising faster than recent closed sales can document.
- Competitive bidding that pushed the contract price above comparable sales.
- Few truly comparable homes nearby, which is common for unusual properties.
- Condition issues or features the appraiser weighed differently than the buyers did.
- Simple differences of judgment, since an appraisal is an informed opinion.
The buyer’s options
Renegotiate the price. Many sellers would rather lower the price than start over with a new buyer and risk another appraisal. Your agent can present the report and propose a new figure.
Pay the difference. If you have the funds and believe the home is worth it to you, you can bring the gap to closing in cash. Check with your lender that this does not change your loan terms, and make sure it does not drain the reserves you need after closing.
Split it. A seller lowers the price part of the way and the buyer covers the rest. This is a frequent compromise.
Ask for a reconsideration of value. If your agent can identify comparable sales the appraiser did not use, or factual errors in the report, the lender can submit a request for the appraiser to reconsider. It does not always change the result, but it is worth doing when there are clear omissions.
Walk away. If your contract includes an appraisal contingency and you are within its deadline, you can typically cancel and recover your earnest money. Read the contingency carefully and confirm the deadline with your agent and attorney before relying on it.
Appraisal gap clauses
In competitive markets, some buyers include language in their offer promising to cover a gap up to a stated amount. This can make an offer more attractive, but it is a cash commitment, and it is not something to add without knowing where the money would come from. If your offer included such a clause, it will shape the options above.
Who to talk to
Your lender can tell you exactly how the appraisal affects your loan amount and whether a second appraisal is possible, which is uncommon but not unheard of. Your agent can run the renegotiation and gather comparable sales. An attorney can confirm what your contract allows and the deadlines you must meet. A financial advisor can help you decide whether covering a gap is wise for your situation. An appraisal gap is a problem with several solutions; the key is choosing one on purpose and in time.
A Worked Example
Numbers make the decision clearer. The figures below are purely illustrative.
Suppose a buyer contracts to purchase a home for $320,000, planning a loan for 90 percent of the price ($288,000) and a 10 percent down payment of $32,000. The appraisal comes back at $310,000, a gap of $10,000. The lender will now base the loan on the lower figure, so 90 percent becomes $279,000.
The buyer’s options might look like this:
- Price reduced to $310,000: the buyer’s down payment becomes $31,000, slightly less than originally planned.
- Price stays at $320,000: the buyer needs $41,000 for the down payment, or $9,000 more than planned, plus closing costs.
- Split the gap at $315,000: the buyer needs $36,000 down, or $4,000 more than planned.
Seeing the numbers in this form helps buyers and sellers judge which option is realistic. Your lender can run the same calculation with your actual loan program, since down payment requirements and mortgage insurance can change the picture.
A Step-by-Step Response Plan
- Get the full appraisal report. Ask your lender for a copy as soon as it is available.
- Review it with your agent. Look at the comparable sales used, any adjustments and the description of the home.
- Check for errors. Square footage, bedroom count, features or condition notes that are clearly wrong are worth raising.
- Confirm your deadlines. Find out how much time you have under your contract to respond.
- Talk with your lender about the numbers. Ask how the new value changes your loan amount, mortgage insurance and cash to close.
- Decide your preferred outcome. Choose whether you will ask for a price reduction, offer to split the gap or cover it yourself.
- Negotiate promptly. Your agent can present the report and your proposal to the seller’s side.
Mistakes to Avoid
- Letting a deadline pass. Contract protections may depend on timing. Act quickly.
- Draining your reserves. Covering a gap with every dollar you have can leave you exposed after closing.
- Assuming the appraiser is wrong. A reconsideration request works best when it is based on clear facts or better comparable sales, not frustration.
- Forgetting the seller’s perspective. A seller may face the same appraisal issue with another buyer. Framing the conversation around shared facts helps.
Appraisal Gap Questions
Does a low appraisal mean I am overpaying?
Not necessarily. An appraisal is an opinion based on available data. It is worth taking seriously, but your own view of the home’s value to you also matters.
Will a low appraisal follow the home to the next buyer?
If the deal falls apart, a new buyer’s lender may order its own appraisal, and the result could be similar. That is one reason many sellers are willing to negotiate rather than start over.
Can a seller require a buyer to cover a gap?
Only if the contract says so, for example through an appraisal gap clause the buyer agreed to. Read your agreement carefully and ask an attorney if you have questions.
Every loan program handles value a little differently, so confirm the numbers for your own situation with your lender before you decide.
