Understanding various terminologies and processes that can affect your mortgage loan can significantly influence your experience when buying and owning a home. An appraisal is an integral part of the mortgage process because it establishes the market value of a property, which lenders use to determine the loan amount.

    The appraisal also protects buyers, ensuring that they’re not overpaying for a property. If the appraisal comes in lower than the purchase price, buyers can use it as an opportunity to negotiate and get the home for a more affordable price. In addition, the appraisal protects the lender, ensuring they’ll be able to recover the loan amount if the borrower defaults and the property must be sold.

    But what happens if there’s a significant difference between the appraised value of the property and its agreed-upon selling price? This phenomenon is called an appraisal gap and can affect your ability to purchase a home because it directly influences your loan amount. Keep reading to learn more about appraisal gaps and what you can do if it happens to you.


    • An appraisal assesses the market value of a property to determine the loan amount and protect buyers from overpaying for the property.
    • Significant differences between the appraised value and purchase price, also known as appraisal gaps, can impact a buyer’s ability to secure a loan, leading to possible renegotiations or buyers covering the costs.
    • Appraisal contingencies, clauses, and coverage can protect both buyers and sellers while ensuring fair transactions and setting expectations in case of valuation discrepancies.

    The Home Appraisal Process

    Before discussing appraisal gaps, it’s necessary to understand the home appraisal process. As mentioned, this process is an important part of the underwriting process, as it helps lenders determine the amount they’re willing to lend for a property.

    Once a home is under contract, the lender typically orders an appraisal to determine the property’s value. The appraiser is from a third-party company and is trained to provide an unbiased valuation of the property. The process continues like this:

    1. Evaluation: The appraiser visits the property to inspect its size, condition, function, and quality. They assess the interior and exterior, noting upgrades, layout functionalities, and potential issues that may affect the value of the home.
    2. Market research: After inspecting the home, the appraiser conducts market research by comparing the property to recent sales of similar homes in the neighborhood, commonly known as comparables or “comps.” This comparison helps provide context for the property’s market value.
    3. Review: Once the appraisal is complete, a report is sent to the lender. This report helps them ensure they’re not lending more money than the property is worth. If the appraised value comes in below the purchase price, this can create challenges in the financing process and lead to an appraisal gap.

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    What Is an Appraisal Gap?

    An appraisal gap refers to the difference between a home’s appraised market value and the purchase price and occurs when the appraiser’s assessment of the property’s worth doesn’t match the price a buyer and seller have agreed on.

    For instance, if a buyer and seller agree to a purchase price of $400,000, but the home is appraised at $370,000, there’s an appraisal gap of $30,000. This discrepancy can pose challenges for both the buyer and the seller.

    For buyers relying on financing, lenders typically finance only up to the appraised value. Therefore, in our example, the additional $30,000 would need to be paid out of pocket, or terms would need to be renegotiated with the seller. Sellers might need to adjust their expectations or potentially face the risk of deals falling through if they’re unwilling to lower the price and the buyer cannot secure additional funding.

    Appraisal gaps are increasingly common in markets where bidding wars can inflate the prices of homes. Buyers may feel pressured to offer higher amounts to secure property without going through the mortgage pre-approval process to know whether they can even afford it. The appraisal can also come back lower than the asking price of the home, potentially creating a volatile situation, as inflated offers can lead to significant gaps.

    What causes an appraisal gap?

    An appraisal gap can arise due to various factors, often influenced by the market and condition of the property. There are also limitations to the appraisal process itself. The most common causes of an appraisal gap include:

    • Hot real estate markets: When there’s a surge in demand for homes but limited supply, multiple buyers may compete for the same property. This competition pushes prices above what an appraiser might consider the home’s market value.
    • Comps: Appraisers base their valuation on recent sales of similar properties in the area. If there haven’t been many recent sales or the homes aren’t truly comparable, the appraised value may not reflect the current market value accurately.
    • Increasing property prices: In markets where property prices increase quickly, historical sales data may not accurately reflect the current market rate. Since appraisers rely on past sales data for evaluations, this can result in a lower appraised value.
    • Subjectivity: Appraisers must follow certain guidelines. However, some degree of subjectivity is still involved in assessing a property’s worth. Two different appraisers can come up with different valuations for the same property based on their interpretation of data.
    • Unique properties: Homes that are unique can be challenging to appraise because there aren’t similar properties to compare them with. In these cases, determining an accurate market value becomes more complicated, and the chances for an appraisal gap increase.
    • Recent upgrades: If a homeowner has made a recent upgrade or renovated, it may not be reflected in comparable sales. Therefore, the appraised value might come in lower than the selling price.
    • External factors: External factors like changes in mortgage rates can influence buyer behavior and home values, potentially leading to appraisal gaps.

    The Risks of an Appraisal Gap

    So, what happens if an appraisal is lower than the offer? Appraisal gaps can lead to issues with a buyer’s ability to finance the property. Remember, lenders tend to only finance up to the appraised value of the home, so if there’s a significant gap, borrowers may not be able to purchase the home. Here are the potential consequences of an appraisal gap:

    • Loss of earnest money deposit: One of the most immediate risks of an appraisal gap is losing the earnest money deposit. The earnest money deposit is a sign of a buyer’s intent to purchase the home and is often put down when an offer is accepted. If a buyer backs out of the deal because of a significant appraisal gap and there’s no contingency in place, they forfeit this deposit.
    • Negative equity: If a buyer chooses to pay the difference between the market value and selling price out of pocket, they might have a negative equity situation. Negative equity happens when they owe more on the property than it’s actually worth, and starting with negative equity means your mortgage is underwater, which can cause challenges in refinancing while increasing the potential for foreclosure if you experience financial hardship.
    • Delayed equity building: Homeownership is a path to building wealth, with the idea being that over time, as you pay down your mortgage balance, you build equity in the property. However, with an appraisal gap, building equity may take more time since you’re starting at a disadvantage.
    • Reselling difficulties: If you face financial difficulties and struggle to make your mortgage payments, you may not be able to sell the property for a high enough amount to cover the mortgage. This is especially true if the property values decrease over time, which can lead to a potential short sale or foreclosure.

    Appraisal Gap Contingencies, Clauses, and Coverage Explained

    When getting a mortgage, you should have a plan in place to determine whether you’re willing to cover an appraisal gap. To protect buyers and lenders from the consequences of appraisal gaps, various provisions like contingencies, clauses, and coverage can be included in real estate agreements. Ensuring the following are included in contracts can protect you from dealing with what happens if an appraisal is lower than the offer.

    Appraisal gap contingency

    An appraisal gap contingency is a provision in a purchase agreement that allows the buyer to renegotiate or withdraw from the contract without penalty if the home’s appraised value comes in less than the agreed-upon purchase price.

    This contingency ultimately protects the buyer from being obligated to cover the difference out of pocket. For instance, if a home is under contract for $500,000 but only appraises for $480,000, there’s a $20,000 gap. If the buyer and seller can’t negotiate the terms agreeable to both of them, like reducing the selling price or additional financing from the buyer, the buyer can walk away from the deal without sacrificing their earnest money deposit.

    Ensuring the appraisal gap contingency is part of your purchase agreement is crucial. If a contingency exists, you can walk away from the deal and keep your earnest money deposit. It’s also always a good idea because it provides a safety net for buyers, ensuring they’re not forced into a situation that might not make sense to them in the long term.

    In addition, the appraisal gap contingency promotes fair transactions by ensuring the price reflects the property’s true market value, forcing sellers to set more realistic prices and allowing buyers to bid more confidently, knowing they have an exit strategy available to them.

    A home appraiser in a blue button up shirt and blazer stands in the room of a home and writes on a clipboard.

    Appraisal gap clause

    An appraisal gap clause is a commitment by the buyer to purchase a home even if its appraised value falls below the purchase price. In competitive markets, this coverage can make a buyer’s offers stand out to sellers, even if there’s the risk of the property not appraising at the agreed-upon purchase price. The primary advantages of appraisal gap clauses is that they increase seller trust and make a buyer’s offer more competitive. By providing proof of funds and commitment to cover potential gaps, sellers feel more secure in the transaction.

    In addition, an appraisal gap clause offers a solution that allows transactions to move forward more smoothly, even when appraisals don’t match expectations. Of course, buyers should be careful when using appraisal gap clauses. Committing to covering large gaps means potentially exhausting your savings or tapping into funds set aside for other purposes, which can affect your ability to repay your mortgage loan.

    Buyers should approach the appraisal gap clause strategically. While it can be helpful in competitive markets, you should ensure you’re not setting yourself up for financial hardship down the line. Borrowers should evaluate their current financial situation by considering the other associated costs of homeownership to ensure they maintain a safety buffer.

    Appraisal gap coverage

    Appraisal gap coverage is a sort of compromise between an appraisal gap contingency and appraisal gap clause. With appraisal gap coverage, the buyer stipulates a certain amount of money they’d be willing to pay over the appraised value. This gives sellers a clearer picture of a buyer’s commitment to proceed with the purchase, even if there is an appraisal gap.

    For instance, if a buyer includes appraisal gap coverage stating they’re willing to pay up to $15,000 over the appraised value and the appraisal comes in $20,000 below the selling price, the buyer would be responsible for only covering $5,000 of that gap.

    The inclusion of this coverage makes offers more attractive to sellers, especially in competitive real estate markets, because it shows sellers that the buyer is invested in the purchase and prepared to commit additional funds if necessary. This can set an offer apart, especially in more competitive situations where multiple bids are on the table.

    At the same time, by providing defined limits, appraisal gap coverage protects buyers by setting boundaries. Buyers ensure they don’t overextend themselves financially when purchasing a home by defining the maximum amount they’re willing to pay over the appraised value.

    What Happens if the Appraisal Is Lower Than the Offer?

    When buyers and sellers agree on the price, they typically consider current market conditions and the emotional connection to the property. For instance, buyers may be willing to pay more if it has a special feature they’re looking for. However, an impartial appraiser evaluates the home based on hard data, comps, and the property’s condition. If their valuation comes in lower, it can introduce challenges to the mortgage and home-buying process. If the appraisal is lower than the offer or purchase price, buyers have options, such as:

    Pay the difference out of pocket

    One of the easiest solutions is for the buyer to cover the difference between the appraised value and the offer price. For instance, if the home was under contract for $400,000 and appraised for $380,000, the buyer can choose to bring an additional $20,000 to the closing table. This option ensures the transaction proceeds as initially planned, but the buyer must have extra funds available and be willing to invest more cash upfront. Remember, unless you’re using a VA loan, you’re already making some type of down payment on the loan, so it’s worth considering whether paying more upfront just to purchase the home is worth it.

    While this approach provides a seamless way to deal with an appraisal gap, investing more upfront might strain the buyer’s liquidity or deplete their savings, potentially leaving them vulnerable to unforeseen expenses or market shifts that leave them unable to repay their mortgage.

    For buyers considering the property a short-term investment, paying significantly over the appraised value could limit potential returns upon resale, especially if market conditions remain steady or decline. Therefore, before committing additional funds upfront, buyers should consider their financial situation and the real estate market to understand the long-term ramifications of their decision. Buyers can also use tools such as a “bid over ask” calculator to estimate how long it would take to breakeven on the additional down payment.

    If the buyer originally planned on putting 20% down to avoid mortgage insurance, they can consider putting less down in order to pay the appraisal gap. If this were to require them to take on PMI, they could then do an MI buyout and at the same time negotiate with the seller to credit the MI buyout.

    Renegotiate the home’s price

    A lower appraisal can serve as a basis for renegotiation of the purchase price. The buyer can approach the seller with this information and suggest reducing the price so it more closely aligns with the home’s market value. Some sellers might be willing to adjust the price, especially if they want to sell quickly or if market conditions have changed since the initial offer.

    Two people wearing suits shake hands over a table that has a clipboard and an orange model home on it while another hand in the background holds a set of keys.

    Unfortunately, there’s no guarantee the seller will agree to a reduced price, especially in a seller’s market when they have all the power. For instance, in situations where the seller has multiple offers, they may feel more confident that another buyer can meet their price regardless of the appraisal.

    The buyer should also evaluate the worth of the property to them on a personal level. If it’s your dream home, it may be worth paying more than the appraised value if possible.

    Dispute the appraisal

    If the buyer believes the appraisal is inaccurate, they can challenge the appraisal, a practice referred to as a Reconsideration of Value (ROV). This process might involve providing additional data or highlighting overlooked property features that could justify a higher valuation. They can also hire an appraiser of their own.

    Unfortunately, disputing an appraisal can be a lengthy process, and there’s no guarantee of a favorable outcome. Challenging an appraisal isn’t about disagreeing with the valuation. Instead, you must present a well-researched and structured argument to support a different valuation. For instance, the buyer could present recent sales of comps in the area the original appraiser overlooked. Or, as another example, home upgrades like a renovated kitchen might not have been accounted for in the original appraisal.

    Walk away

    If the buyer and seller can’t reach an agreement, walking away may be the best way to deal with an appraisal gap. In many purchase agreements, there’s a contingency that allows the buyer to back out of the contract without penalty if the appraisal comes in lower than the offer price.

    Walking away from a property can be difficult, but sometimes it makes the most sense. By using the appraisal contingency in the agreement, the buyer can exit the transaction and ensure they’re not overpaying or overextending themselves financially.

    For sellers, a buyer choosing to use their appraisal contingency is considered a setback and means returning to the market and adjusting their pricing strategy. Sellers may not want you to walk away, so you should never be afraid to try negotiating with them.

    Even if you do walk away from the sale, the sellers will have received valuable information they can use to recalibrate their approach and ensure their property is priced to accurately reflect its true market value to minimize future appraisal gaps.

    For buyers, walking away can be a good learning experience to help you understand how much you’re willing to negotiate in terms of whether you’ll pay any amount of the difference between the appraisal and purchase price. Then, next time you’re interested in a home, you can use the knowledge you’ve gained to make a decision that suits you.

    Know Your Options in Case of an Appraisal Gap

    Navigating the home purchasing journey can present unexpected challenges like appraisal gaps. As a buyer, it’s crucial to understand that if a home’s appraised value falls short, you have multiple options, such as paying the difference, disputing the appraisal, or walking away.

    Whatever your decision, remember you’re not alone. With Griffin Funding, you’re partnering with a trusted name in the industry that understands the home-buying process and different types of loans, from conventional to Non-QM loans. We prioritize your best interests, and our dedicated team is ready to guide you through the process of purchasing a home. Reach out to us to learn more about the financing products we offer or apply for a mortgage online today.

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    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.