Quick answer: An appraisal gap happens when the appraised value is lower than the price in the purchase contract. Because the loan is generally calculated using the lower of the purchase price or appraised value, the gap can increase the buyer’s cash requirement or force the parties to restructure the transaction.
Example of an appraisal gap
Assume a buyer agrees to pay $400,000, but the appraisal is $390,000. The $10,000 difference is the appraisal gap. The lender does not simply add that difference to the approved loan amount. Depending on the loan structure, the buyer may need more cash, a lower purchase price, or a different financing solution.
Options when the appraisal comes in low
- Ask the seller to reduce the price.
- Split the difference with the seller.
- Bring additional cash if the budget and loan rules allow it.
- Change the down payment or loan structure.
- Request a reconsideration of value using relevant comparable sales or correcting factual errors.
- Use an appraisal or financing contingency if the contract provides that protection.
A reconsideration is not a guarantee of a higher value. The strongest request identifies objective errors or better comparable sales rather than simply disagreeing with the appraiser.
Be careful with appraisal-gap guarantees
Some offers promise to cover a gap up to a stated dollar amount. That can make an offer more competitive, but it can also create a large and unexpected cash obligation. Before signing, coordinate with both the real estate agent and mortgage advisor so you understand the maximum exposure and still have money left for closing costs and reserves.
For more preparation, review down-payment requirements and the mortgage calculators.
Contract rights vary. Consult your real estate professional or attorney about the purchase agreement.