Key takeaways:
- About 8% of home appraisals come in below the contract price, creating appraisal gaps where buyers may need to cover the difference or renegotiate.
- Appraisal gaps are most common in competitive markets like Los Angeles, Austin, or Chicago, especially with rapidly rising prices or unique homes.
- Buyers can manage gaps by budgeting extra cash, negotiating with the seller, requesting a reconsideration of value, or using an appraisal contingency to back out safely.
An appraisal gap occurs when a home’s appraisal value comes in lower than the price the buyer agreed to pay. This is a common challenge in competitive housing markets, where roughly 8% of home appraisals come in below the contract price.
This is particularly prevalent in real estate markets like Los Angeles, CA, Austin, TX, or Chicago, IL, where bidding wars often drive prices above the appraised value. Since lenders go by the appraisal, not the sale price, buyers usually have to pay the difference. This Redfin guide explains why appraisal gaps happen and how to deal with them.
Table of contents
- What is an appraisal gap?
- Why do appraisal gaps happen?
- How does an appraisal gap work?
- How the home appraisal process works
- Appraisal gap clauses explained
- What should you do when the appraisal is less than the offer?
- The bottom line
- Appraisal gap FAQs
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Get prequalifiedWhat is an appraisal gap and why does it happen?
An appraisal gap occurs when a home’s appraised value comes in lower than the price you agreed to pay. This doesn’t automatically end the deal, but it can create complications—you may need to cover the difference out of pocket or renegotiate with the seller. If no agreement is reached, you could risk losing the home or even your earnest money.
Appraisal gaps often happen in competitive housing markets due to factors like:
- High competition: Buyers may offer more than a home’s appraised value.
- Rapidly rising prices: Appraisals rely on older sales data that may not reflect current market trends.
- Unique upgrades: Custom features can make it difficult to find comparable homes.
- Limited recent sales nearby: Fewer sales mean less data for an accurate appraisal.
- Emotional bidding: Buyers sometimes overpay when attached to a home.
>>Read: Earnest Money: What Is It and How Much Should You Pay?
How does an appraisal gap work?
Imagine you’ve found the home of your dreams and make an offer of $400,000, but the appraisal comes in at $380,000. Since your lender bases the loan amount on the appraised value, they’ll only finance 80% of $380,000—not the $400,000 you agreed to pay. This means you’ll need to cover the $20,000 difference yourself or try to negotiate with the seller to lower the price.
Appraisal gaps can create financial strain for buyers, especially if they haven’t budgeted for this unexpected cost. If you’re unable to make up the difference, you might lose the home or risk your earnest money if you’ve waived certain protections.
However, if you are paying all cash or if the home appraises at or above your offer, you won’t face an appraisal gap.
How the home appraisal process works
Mortgage lenders only finance up to a home’s appraised value, so they order an appraisal to confirm fair market value. This protects buyers from overpaying and lenders from lending more than the home is worth.
If a home appraises lower than the offer—for example, $380,000 on a $400,000 offer—the loan will be based on the lower amount. In competitive markets, buyers may waive the appraisal contingency or offer an appraisal guarantee, paying the difference in cash if the appraisal comes in low.
Appraisers assess a home’s value based on four main factors:
>> Read: Home Appraisal Tips for Sellers
Similar homes that sold recently
Appraisers use recent sales of similar homes (“comps“) to determine a property’s value. These recently sold homes will be in the same area and are similar in size, condition, age, and features. By analyzing what buyers have actually paid for comparable properties, appraisers can make a data-backed estimate of what the current home is worth. The more recent and similar the comps, the more accurate the appraisal will be.
The home itself
The property’s individual features play a big role in the appraisal. Key factors include the home’s square footage, number of bedrooms and bathrooms, layout, and overall condition. Recently renovated homes or those with upgraded kitchens, bathrooms, or major systems (like HVAC or a new roof) tend to appraise higher than homes needing significant repairs or updates. Cleanliness and staging don’t officially impact value, but a well-kept home can leave a better impression.
The neighborhood market
Appraisers take into account the current pace of the local real estate market. Is the area experiencing a lot of buyer activity? Are homes sitting on the market longer than usual? A hot market—where homes are selling quickly and often above asking price—can lead to higher appraisals. On the other hand, in slower markets, appraisers may be more conservative, even if your offer is strong.
What’s nearby
Location always matters and appraisers will look at nearby amenities and surroundings to evaluate desirability. Homes close to highly rated schools, parks, grocery stores, and walkable streets tend to appraise higher. In contrast, properties near busy roads, industrial areas, or those with limited access to local conveniences may appraise for less.
>>Read: What is a Home Appraisal: How the Process Works
Appraisal gap clauses explained
When an appraisal comes in lower than the offer, these common clauses determine how the deal moves forward and how much financial risk the buyer assumes:
- Guarantee clause: The buyer agrees to pay the full difference no matter how low the appraisal comes in. This makes offers stronger in competitive markets but increases buyer risk.
- Contingency clause: This protects the buyer by allowing them to back out or renegotiate if the appraisal is lower than the offer. It provides flexibility but may weaken the offer in a bidding war.
- Gap coverage clause: The buyer agrees to cover a portion of the appraisal gap up to a specified amount, making their offer more competitive without excessive risk. You and the seller should agree on the exact amount you’ll cover—or whether you’ll split the difference—and put it in writing.
What should you do when the appraisal is less than the offer?
Appraisal gaps don’t have to be a deal-breaker. When you know what to expect and have a plan, you can keep things moving forward.
Be financially prepared
If the appraisal comes in low, your lender will only finance up to the appraised value, and you may need to cover the difference out-of-pocket. This happens when the seller won’t agree to lower the price. In that case, you’ll need to pay the difference between the sale price and the appraised value, on top of your agreed-upon down payment. Setting aside extra cash upfront can help you act quickly and keep the deal alive without scrambling for funds.
An appraisal contingency lets you back out or renegotiate without losing your earnest money. But if you’ve waived it or included a gap clause, you may be locked into the deal, and risk losing your earnest money if you walk away. If you’re short on cash, consider asking family for gift funds or using your investments. You might also be able to access retirement savings without a penalty—check with your 401(k) provider or tax advisor. If you own other property, tapping into home equity could help cover the gap.
Negotiate with the seller
It could be worth trying to negotiate with the seller—especially in a balanced or buyer-friendly market where sellers may be more flexible. If you have an appraisal contingency in your contract, start by asking the seller to lower the price to match the appraised value. This would eliminate the appraisal gap entirely.
If the seller won’t agree to that, you could propose splitting the difference. For example, if the gap is $10,000, you might ask the seller to reduce the price by $5,000 while you cover the remaining $5,000. You can also ask for other concessions, such as closing cost credits, to help bridge the gap.
Just keep in mind: negotiating in a seller’s market can be risky. If the seller has a kick-out clause, they could entertain another offer while giving you a short window to remove your contingency and proceed. If you don’t act quickly, they could choose the other buyer.
Request a reconsideration of value (RVO)
Sometimes, buyers or sellers don’t agree with the appraisal. In this case, you can request a reconsideration of value through your lender. This involves submitting a written request that includes additional, more accurate comparable sales or pointing out errors in the original report.
To successfully dispute the appraisal, you’ll need strong evidence showing that the appraiser:
- Used inappropriate comparable sales when better options exist
- Missed key features or upgrades in the home
- Made mistakes in the report
- Conducted only a drive-by or exterior inspection
While there’s no guarantee the appraised value will change, it’s a worthwhile option—especially if your agent can help pull together stronger data to support your case.
Use your appraisal contingency to exit the deal
If you’ve included an appraisal contingency in your offer, you have an important safety net. If the appraisal comes in low and you can’t reach an agreement with the seller, this clause allows you to back out of the deal without losing your earnest money.
Before backing out, consult your attorney—especially if your contract doesn’t include an appraisal contingency, as you could risk losing your earnest money.
The bottom line
Appraisal gaps happen when a home appraises for less than your offer, and you’re left to cover the difference. They’re especially common in competitive markets or with unique homes that are tough to compare. The good news? You have options.
Talk to your Redfin agent early in the process. They can tell you how often appraisal gaps happen in your area, what the typical gap looks like, and how to structure your offer with the right protections. A strong strategy upfront can save you stress later.
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ContinueAppraisal gap FAQs
How do you cover an appraisal gap without cash?
If you’re short on cash, you might renegotiate the purchase price, switch to a loan with a lower down payment to free up funds, or request seller concessions. In some cases, financial gifts from relatives or down payment assistance programs may help.
Does an appraisal gap affect refinancing?
Yes. If your home appraises for less than expected during refinancing, it could reduce how much you’re eligible to borrow, limit your ability to cash out equity, or make it harder to remove mortgage insurance.
What’s the difference between an appraisal gap clause and a waiver?
An appraisal gap clause means the buyer agrees to cover part or all of the difference if the appraisal comes in low. An appraisal waiver removes the appraisal contingency altogether, so the buyer must proceed with the purchase regardless of the appraised value.
Can you dispute a low appraisal?
Yes. Buyers or mortgage lenders can submit a reconsideration of value (RVO) if they believe the appraisal is inaccurate. This involves providing new comparable sales, pointing out errors, or correcting overlooked home features—but approval isn’t guaranteed.
