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 is lower than the agreed-upon purchase price, creating a difference the buyer must cover, renegotiate or walk away from depending on the contract terms. 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. Because lenders base loan amounts on the appraisal—not the purchase price— buyers are typically responsible for covering this difference out-of-pocket. In this Redfin guide, we’ll explain why appraisal gaps happen and how buyers can effectively navigate them.
What 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
Lenders order appraisals to ensure the property’s fair market value supports the loan amount. If a home appraises at $380,000 on a $400,000 offer, the lender will only finance based on the $380,000 value, leaving the buyer to bridge the gap.
Appraisers determine this value by focusing on four primary categories:
- Recent Comparable Sales (“comps“): Appraisers look at similar homes nearby that sold recently. They match size, age, and features to provide a data-backed estimate of what buyers are currently paying.
- Property Features & Condition: Key physical factors include square footage, layout, and the number of bedrooms/bathrooms. Upgraded systems (HVAC, roof) and renovated kitchens or baths significantly boost value.
- Local Market Trends: Appraisers assess if the market is “hot” (homes selling quickly above asking) or “slow.” In a rapid market, appraisals may be higher; in a sluggish market, they tend to be more conservative.
- Location & Amenities: Proximity to high-rated schools, parks, and walkable shopping increases desirability. Conversely, being near industrial zones or heavy traffic can lower the appraisal.
>>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 the appraised value. If the seller won’t budge on price, you must pay the difference, on top of your down payment, to keep the deal alive.
Ways to cover the financial gap:
- Cash reserves: Use extra savings set aside specifically for market volatility.
- Gift funds: Ask family members for a financial gift to help bridge the difference.
- Investment/Retirement accounts: Sell stocks or look into penalty-free 401(k) withdrawals for first-time home purchases (consult a tax advisor first).
- Home equity: If you own other property, consider a HELOC or home equity loan.
Know your protections:
- With a contingency: You can renegotiate or back out safely while keeping your earnest money.
- Without a contingency: If you’ve waived this right or signed a gap clause, walking away could mean losing your earnest money deposit.
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.
According to Kamal Mohammad of Quality Properties Of Northwest Florida:
“The best way to bridge the gap between the appraised value and the offer is for the buyer to counter their first offer to the home’s appraised value. Since the buyer now has proof of the home’s current value, the seller will likely match the appraised value to close the gap.”
If the seller isn’t willing to drop the price entirely, consider these alternatives:
- Split the difference: If the gap is $10,000, ask the seller to reduce the price by $5,000 while you cover the remaining $5,000.
- Request concessions: Ask for closing cost credits to offset the extra cash you’re bringing to the table.
- Watch the clock: In a seller’s market, act quickly. If the seller has a “kick-out clause,” they may move to another offer if you don’t resolve the contingency promptly.
Request a reconsideration of value (RVO)
If an appraisal is contested, buyers or sellers can ask their lender for a reconsideration of value. This requires a written request with better comparable sales or by identifying 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.
Appraisal 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.
Do appraisal gaps affect refinancing?
Yes. If your home appraises for less than expected when you refinance your mortgage, 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 will cover some or all of the difference if the appraisal is low. An appraisal waiver removes the appraisal contingency, requiring the buyer to proceed regardless of the appraised value.
What’s the difference between appraisal gap coverage and an appraisal contingency?
Can you dispute a low appraisal?
Buyers or lenders can submit a reconsideration of value (RVO) if they deem the appraisal inaccurate. This requires new comparable sales, pointing out errors, or correcting overlooked features, but approval is not guaranteed.