What is an Appraisal Gap? How it Impacts Buyers
When buying a home, unexpected surprises can arise. One of the most common and potentially stressful, is the appraisal gap.
In today’s competitive housing market, appraisal gaps are becoming more frequent, and understanding them is essential for buyers. In this blog, we’ll break down what an appraisal gap is, why it happens, and what strategies you can use to manage it with confidence.
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What Is an Appraisal Gap?
An appraisal gap happens when the home you’re buying is valued by the appraiser for less than the sales price you agreed to in your offer. Because lenders base the loan amount on the appraised value, rather than the purchase price, this difference creates a shortfall that buyers may need to cover.
Before you can close on your loan, the home must be appraised. An appraisal is a licensed appraiser’s professional estimate of the home’s fair market value at that time, based on its size, condition, location, upgrades, and recent comparable sales.
For example, in your initial offer, you agree to buy a house for $300,000, but the appraisal comes in at $280,000. Your lender will approve the loan based on $280,000, leaving a $20,000 gap. Unless the seller lowers the price or you bring extra cash to the table, the deal could stall.
These gaps often appear in hot housing markets where multiple offers push prices above market value.
Why Do Appraisal Gaps Happen?
An appraisal gap usually isn’t the result of one mistake; it’s the product of how today’s real estate market works. Here are the most common reasons buyers run into this issue:
Bidding wars drive prices higher. In competitive markets with limited inventory, buyers often offer more than the asking price. While this may secure the deal, it can also push the contract price above recent comparable sales.
Home prices rise faster than appraisals. Appraisers examine past sales in the area to determine value. If prices are rising quickly, those older comps may not reflect current demand, resulting in a lower appraisal.
Appraisers must remain independent. Even if both the buyer and seller agree on a price, the appraiser’s role is to provide an unbiased opinion of value.
Together, these factors create the gap between the appraised value and the purchase price. For buyers, knowing why appraisal gaps happen makes it easier to anticipate one and prepare.
How Does an Appraisal Gap Impact Buyers?
When an appraisal gap occurs, the biggest challenge is financing. Mortgage lenders will only lend up to the home’s appraised value. That difference creates a few challenges for buyers:
Extra out-of-pocket costs. If the appraisal comes in low, you may need to cover the gap with cash or savings to move forward.
Financing limitations. If you can’t make up the difference, your lender won’t fund the full purchase, which could cause the deal to fall through.
Earnest money at risk. Without an appraisal contingency, you may lose your earnest money deposit if you back out of the sale due to a low appraisal.
Stress during negotiations. A gap can create tension between buyer and seller. The buyer may push for a price reduction, while the seller may resist lowering the price.
Beyond the financial strain, appraisal gaps can also delay closing and add stress. By understanding these risks, buyers can better prepare themselves and make confident decisions.
How Do You Handle an Appraisal Gap?
When an appraisal comes in low, your options are to bring cash, renegotiate, request reconsideration of value, use a gap clause, or rely on your appraisal contingency.
Option 1: Bring Extra Funds to Closing
Cover the difference between the contract price and the appraised value with extra money at closing. This is the most direct solution, though it can stretch your budget.
Option 2: Negotiate with the Seller
Ask the seller to lower the price or meet you halfway. Sellers eager to close may be open to compromise.
Option 3: Request a Reconsideration of Value
If you believe the appraisal overlooked important details, your lender can submit a request with stronger comparable sales or additional information.
Option 4: Use an Appraisal Gap Clause
This clause commits you to covering a certain amount of the gap (for example, up to $10,000), while still protecting you if the shortfall is larger.
Option 5: Rely on Appraisal Contingencies
Keeping an appraisal contingency in your contract gives you the ability to walk away without losing your earnest money if the appraisal comes in too low.
Navigating Appraisal Gaps with Confidence
An appraisal gap doesn’t have to stop your homebuying journey. By understanding what it is, why it happens, and the options available to manage it, you can approach the situation with confidence. Whether it’s negotiating with the seller or protecting yourself with contingencies, there are strategies to keep your purchase on track.
With My Gates Team, our team helps navigate challenges like appraisal gaps every day. We’ll work with you to explore your financing options and guide you through the process from start to finish. If you’re preparing to buy a home, contact us today to get expert advice and peace of mind.