Appraisal gap: what happens when the appraisal comes in low

An appraisal gap is the difference between the contract price and a lower appraised value. Lenders lend on the lower figure, so someone has to cover the gap. The usual options: the seller lowers the price, the buyer pays the difference in cash, the two split it, the buyer challenges the value, or the buyer cancels under an appraisal contingency.

More on this topic: Contract to close: process and checklists, every guide in one place.

The option that's actually available depends on what the contract says and, above all, on when the low appraisal arrives compared with the appraisal and financing deadlines. This guide walks through both. Closingbird's deadline tracking keeps both dates in front of you.

Why a low appraisal creates a gap

A mortgage lender sets the maximum loan from the property's value, and for a purchase that value is normally the lower of the price and the appraisal. Here's an example with made-up numbers:

The lender's actual loan-to-value rules depend on the loan program, so ask the loan officer to run the real numbers for the file.

The five options when the appraisal comes in low

1. The seller reduces the price to the appraised value. The cleanest fix if the seller agrees, often because the next buyer's lender would see the same appraisal.
2. The buyer covers the gap in cash. Possible if the buyer has the funds and still wants the home at the agreed price.
3. Split the difference. The seller drops part of the way and the buyer brings cash for the rest.
4. Challenge the appraisal. The buyer, through the lender, asks for a reconsideration of value with better comparable sales or corrected facts. It doesn't always work and it takes time, so watch the dates while it's pending.
5. Cancel under a contingency. If the contract has an appraisal contingency, or a financing contingency that covers it, the buyer may be able to terminate and get the earnest money back, provided they act before the deadline.

Any agreed change to price or terms should go into a signed amendment. See addendum vs amendment for how that changes the rest of the file.

The appraisal contingency vs the financing contingency

These are often separate clauses with separate dates, and the difference matters when the appraisal is low:

Some forms fold the appraisal into the financing contingency. Some have no appraisal contingency at all unless one is added. Government-backed loans can add their own appraisal terms through a required addendum or amendatory clause. Check your state's contract and any loan addenda on the file.

Appraisal gap clauses

In competitive markets, buyers sometimes agree in the offer to cover a gap up to a set amount. As an example: on a $400,000 offer with a gap clause of up to $10,000, a $390,000 appraisal means the buyer pays the extra $10,000 in cash and the price stays the same. If the appraisal came in at $380,000, the buyer covers $10,000 and the parties renegotiate or the contingency applies to the rest, depending on how the clause is written.

Gap clauses aren't standard on every form. Where they're used, they're usually an addendum, so read the exact wording: whether it's a fixed amount or a percentage, and whether the buyer can still cancel beyond it.

The timing problem

Most appraisal disputes become deadline disputes. Three dates matter:

• When the appraisal is ordered. Lenders order it, often after the inspection period. Ask early.
• The appraisal deadline. The last day to object or terminate over value. If the report lands the day before, there's almost no time to negotiate.
• The financing deadline, which may come later and give a second route out.

If the report is late, consider asking for a signed extension of the appraisal deadline before it passes. Our guide on what happens if you miss a contingency deadline explains what's at stake if nobody acts.

A checklist for a low appraisal

• Get the full appraisal report from the lender and note the date it was received.
• Recheck the appraisal and financing deadlines, and how each is counted.
• Ask the loan officer for the new numbers: loan amount, cash to close, and whether approval still stands.
• Decide whether a reconsideration of value is worth requesting, and if so, gather comparables.
• Send the seller's side a written proposal, and set a response date before your deadline.
• Put any agreement in a signed amendment, or deliver the termination notice in time.
• Update every deadline and the closing date the agreement touches.

Closingbird's deadline tracking keeps the appraisal and financing dates on the file and reminds the right person before each one, and document requests chase the lender for the report. E-signatures get the amendment signed from the same file.

This guide is general information, not legal or lending advice. Contract terms and loan rules vary; check your state's contract and ask the lender about the numbers.

Frequently asked questions

Who pays the appraisal gap?

Whoever agrees to. Without a gap clause, the buyer and seller negotiate: the seller can lower the price, the buyer can pay cash, or they can split it. If neither will, an appraisal or financing contingency may let the buyer cancel.

Can the buyer walk away if the appraisal is low?

Often, if the contract has an appraisal contingency (or a financing contingency that covers value) and the buyer acts before its deadline. Without one, cancelling may put the earnest money at risk.

Can you dispute a low appraisal?

Yes, through the lender, usually called a reconsideration of value. The buyer's side supplies better comparable sales or corrects factual errors. The appraiser may or may not change the value.

Does a low appraisal affect the seller's next buyer?

It can. For some loan types an appraisal stays with the property for a period, and any new buyer's lender may see similar comparable sales, which is one reason sellers often negotiate.