Appraisal Gap: What You Should Know (2024)

Buying a home can be a lengthy process—getting prequalified by a lender, an offer accepted, a home inspection, then closing the deal. Lenders also require a home appraisal to determine the fair market value of the house. It’s important the buyer is paying a fair price and the seller is earning a reasonable amount from the sale of their home.

But an appraisal gap—when the home’s market value is less than the purchase price—can significantly impact what you pay for your dream home, and whether you can even buy it.

What Is an Appraisal Gap?

An appraisal gap is the difference between how much a home was appraised for and how much you agree to pay for it as a potential buyer. Home appraisals are usually required by banks in order to finance the home purchase.

In most instances, banks won’t give you a loan for more than a home’s appraisal price. For example, let’s say you’ve put a generous offer on a home of $350,000 but the appraisal comes in at just $300,000—the $50,000 difference is the appraisal gap.

Related: Assessed Value Vs. Market Value: What’s The Difference?

What to Do If the Appraisal Is Less Than Your Offer

If you find yourself facing an appraisal gap, you have a few options to consider:

1. Renegotiate With the Seller

If the appraisal comes back lower than what you offered, you can talk to the seller about renegotiating the offer. You might want to compromise and split the difference of the appraised value compared to your original offer. Or you can ask if they’re willing to come down in price from the offer you gave them before the appraisal.

While this might work in some instances, it will really depend on how much competition is there for the house. If there’s a lot of interest and others have the cash to cover that gap, you might not have any leverage. But if you’re the only offer or one of very few offers, you could have a good chance, especially if there are concessions added or removed to sweeten the deal. It will also depend on where you live and the market conditions at the time.

Related: Should You Pay Above The Appraised Value Of A House?

2. Create an Appraisal Gap Clause

An appraisal gap clause is a contingency typically found in the original offer letter that protects the buyer from overpaying for the house. This is more of a preventative measure that can give you the upper hand in negotiating in case an appraisal gap comes up.

Let’s say you put in an offer of $300,000 on a home that was listed for $320,000. Your appraisal contingency (or gap clause) might say that you’re willing to put in an extra $20,000 based on the appraisal. So if the appraisal comes back at $320,000, you’ll fork over the extra cash. If it comes back at $330,000, it’s back to the negotiating table.

Tip: You can write the clause however you and your real estate agent see fit. Although your situation might not always warrant an appraisal gap clause, it might be worth adding for safety.

3. Dispute the Appraisal

When you get pre-approved for a mortgage, that lender often chooses who will appraise the home. If you feel the appraised home value is much less than you expected (and would require you to pay much more than you agreed to in your offer), you can file a dispute with your lender and request a new appraisal be conducted.

In the dispute, you’ll need to include any information that you feel was overlooked in the final appraisal that brought down its value.

Tip: Remember that you’re on the hook for paying the appraisal fee—typically $300 to $500—so if you can afford to get a new appraiser out to the property, you might want to consider this route. If you can’t get a new appraiser from the lender you went with, you might want to try another lender who can hire a different appraiser.

Related: How Much Does A Home Appraisal Cost?

4. Pay the Difference

Maybe you love the home so much that the appraisal gap isn’t a big issue for you, or perhaps you stashed away extra cash in case something like this came up.

If you’re OK with paying the difference, it will get added to your closing costs. So when you make that payment—including your down payment and other fees from the purchase—you’ll pay the difference from the appraisal gap as well. This can be a hefty payment, so only go this route if you’re sure you have enough to cover the cost.

5. Let It Go

Buying a home can be a stressful process. If you don’t think you can afford to pay the difference and haven’t made any headway in renegotiating, it might be best to walk away.

In some cases, walking away might not be ideal, especially if you need to find a home quickly—like if you got a new job that requires you to relocate. But if you’re not financially prepared to pay the difference, letting the home go and finding something else could be the best course of action.