The Appraisal Gap: What Happens When the Home Appraises Low
You agreed to a price, but the appraisal came in lower. Here is what that gap means, how the math works, and what your options are.
The quick take
An appraisal gap is the difference between the price you agreed to pay and a lower appraised value. The lender bases your loan on the appraisal, so you generally need to cover the difference, renegotiate, or walk away, depending on your contract.
What an appraisal gap is
When you buy with a loan, the lender orders an appraisal. A licensed appraiser estimates what the home is worth. The lender will only lend against the appraised value or the price, whichever is lower. If the appraisal comes in below the price you agreed to pay, the difference is the appraisal gap.
It is more common in competitive markets, in rising markets, with unusual homes, and where few similar homes have sold recently. Redfin reports that roughly 8% of appraisals come in below the contract price.
A simple example
This is a simplified example with round numbers. Your loan type and lender rules can change the math.
• You agree to buy a home for $800,000 and plan to put 20% down, which is $160,000, with a $640,000 loan.
• The home appraises at $775,000, which is $25,000 below the price.
• The lender will lend 80% of $775,000, or $620,000, instead of $640,000.
• To close at $800,000, you need $180,000 in cash instead of $160,000. That is $20,000 more than you planned.
Your options
Renegotiate: Ask the seller to lower the price to the appraised value, or to meet in the middle. Sellers sometimes agree, especially if the home would otherwise go back on the market.
Cover the gap: Pay the difference in cash from savings or other eligible funds. This keeps the deal alive, and it is a choice about how much you are willing to pay above appraised value.
Challenge the appraisal: Your lender may be able to request a reconsideration of value, if you have strong comparable sales or evidence of errors. There is no guarantee it will change.
Walk away: If your contract has an appraisal or financing contingency and you act on time, you may be able to cancel and recover your earnest money. Without that protection, you may risk the deposit.
Gap clauses in offers
In competitive situations, buyers sometimes include language promising to cover some or all of a low appraisal. It can make an offer more attractive, and it also means you take on the risk. If you consider it, decide the most you are comfortable paying and put that number in writing.
From our experience
We have seen buyers decide, in advance, that they would cover a specific amount over appraisal, and others decide they would not cover any. Both can be the right call. What matters is deciding before you are in the middle of a deal, with the clock ticking.
What this means if you are selling
A low appraisal can slow or break a sale. A well-supported price, with recent comparable sales that fit your home, makes a low appraisal less likely. Your agent can help you prepare, and can talk through what to do if the number comes in short.
Questions to ask your agent
• Does my offer have an appraisal or financing contingency, and when does it expire?
• How much cash could I bring if the appraisal comes in low?
• What comparable sales support this price?
Want the full list of terms?
See our plain-English glossary of real estate terms: www.kellyazzarello.com/jargon
Questions? We are glad to help.
If any of this raises a question about your own situation, reach out. If you need an answer faster, call and we will talk it through.
Kelly Azzarello Real Estate | Compass
Email: kelly@kellyazzarello.com
Phone: (425) 830-6457
Sources and credits
We looked to NWMLS first and then Compass. Neither publishes a plain-language definition of this term, so the points above draw on the sources below, in our own words. General information only, not legal or financial advice. Confirm current details with your agent or lender, since forms and rules change.
Redfin, What Is an Appraisal Gap?
Madrona Group, What Is a Financing Contingency in Washington