Appraisal Gap: How Home Buyers Can Handle a Low Appraisal

An appraisal gap occurs when a home’s appraised value is lower than the buyer’s agreed-upon purchase price. This situation can create financing challenges, as lenders typically base their mortgage approvals on the appraised value rather than the contract price.

If an appraisal gap arises, buyers have a few options: pay the difference in cash, renegotiate with the seller, dispute the appraisal, seek a different lender, or walk away from the deal (if an appraisal contingency is in place). Understanding these options can help buyers navigate the process and avoid unexpected financial strain.

What Happens When the Appraisal is Lower Than the Offer?

Lenders require an appraisal to ensure the home is worth the amount they are financing. When an appraisal comes in lower than expected, buyers have several choices:

• Pay the difference in cash between the appraised value and the purchase price.
• Renegotiate the purchase price with the seller.
• Dispute the appraisal by requesting a review or second appraisal.
• Apply with another lender in hopes of securing a more favorable appraisal.
• Walk away from the sale, if an appraisal contingency is in place.

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The best option depends on the buyer’s financial situation, the seller’s willingness to negotiate, and overall market conditions.

How to Handle an Appraisal Gap

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1.

Pay the Difference in CashThe most straightforward way to cover an appraisal gap is for the buyer to pay the difference in cash.For example:

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• If the purchase price is $330,000 but the home appraises for $300,000, the lender will base financing on the lower value.
• If the loan requires a 5% down payment, the lender will cover 95% of the appraised value ($285,000).
• The buyer must now bring $45,000 in cash to cover the $30,000 appraisal gap plus their $15,000 down payment.

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This option is ideal for buyers who have the extra cash and want to secure the home without renegotiating. However, it can put financial strain on those who planned for a smaller cash outlay.

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2.

Renegotiate with the SellerIf the contract includes an appraisal contingency, the buyer can request that the seller lower the purchase price to match the appraised value or split the difference.

• The seller may agree to reduce the price, especially if the home has been on the market for a while.
• Alternatively, the seller may agree to split the appraisal gap with the buyer to keep the deal alive.
• In a competitive seller’s market, the seller may refuse and opt for another offer instead.

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3.

Dispute the Appraisal or Get a Second OpinionBuyers can challenge the appraisal if they believe it contains errors or does not accurately reflect market value.

• Work with your real estate agent to provide recent comparable sales (comps) that support a higher valuation.
• Request a formal appraisal review from the lender.
• Seek a second appraisal from a different lender, though this may delay closing.

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Disputing an appraisal can be time-consuming and is not always successful, particularly in a fast-moving market where sellers have multiple offers.

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4.

Apply with Another LenderSince different lenders work with different appraisers, applying for a mortgage with another lender may yield a more favorable appraisal.

However, this approach is not guaranteed to succeed, and the additional time required may cause the seller to move on to another buyer.

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5.

Walk Away from the SaleIf an appraisal contingency is included in the contract, the buyer has the right to walk away without penalty if the appraisal comes in too low.This is the least risky option financially, as it prevents buyers from overpaying.

However, in a competitive market, buyers who frequently back out of deals due to low appraisals may struggle to secure a home.

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Appraisal Gap Coverage: Limiting Your RiskIn a hot real estate market, some buyers include an appraisal gap coverage clause in their contract.

This clause states that the buyer agrees to cover a specific portion of the appraisal gap to keep the deal moving forward.For example:

• A buyer offers $350,000 for a home.
• The home appraises for $320,000, creating a $30,000 gap.
• The buyer has appraisal gap coverage of $20,000 in their contract.
• Since the gap is greater than the coverage, the buyer can withdraw their offer and get their deposit back.

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This approach reassures sellers that the buyer is serious while also setting a clear financial limit for the buyer.Who Benefits from an Appraisal Gap Clause?

• In a seller’s market, appraisal gap clauses benefit sellers because they reduce the risk of financing-related delays or cancellations.
• In a buyer’s market, these clauses protect buyers by ensuring they do not overpay beyond a set amount.

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A strong offer with proof of funds to cover an appraisal gap can also make a buyer’s bid more attractive in competitive bidding situations.

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An appraisal gap can be an unexpected obstacle, but it doesn’t have to derail a home purchase. Buyers should evaluate their financial situation and market conditions before deciding how to handle a low appraisal.

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If an appraisal gap occurs, buyers have multiple options, from paying the difference in cash to renegotiating or walking away. In competitive markets, an appraisal gap clause can help secure a home while limiting financial exposure.

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Understanding these strategies can help buyers navigate the home-buying process with confidence and make informed decisions when faced with an appraisal gap.

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Disclaimer: This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.

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