What is an appraisal gap?

3 min read

Written by Peter Khoury


Learn about appraisal gaps and how to handle them when buying your home

In a hot market, demand usually exceeds supply thus leaving buyers having to bid over the actual value of the house. As an industry expert with over 15 years of lending, real-estate, appraisals, and contracts I am going to break down some insider tips and tricks.

What is an appraisal gap?

An appraisal gap is a difference between the fair market value determined by a licensed third party appraisal and the amount you agreed to pay for the home that is on your purchase contract.

If the value of the home comes in at less than what you said you are willing to pay for the home, you can negotiate with the seller.

Sometimes in a hot market, you have to release your right to negotiate which is called an appraisal contingency. You can get creative and release your appraisal contingency but leave a caveat with only paying a certain amount out of pocket and the difference is up for negotiation. I would leave this to your realtor to decide which angle is best depending on the strategy you're using to win.

What is an appraisal?

An appraisal is an unbiased professional opinion of a home's value and is used whenever a mortgage is involved in buying, refinancing, or selling that property.

How much do you have to pay if the appraisal comes in lower than the purchase price?

Extra Out of Pocket = (PurchasePrice - AppraisedValue) * (100% - DownPayment%)

Purchase priceAppraised valueDown payment %Appraisal gapExtra out of pocket

Can an appraisal gap have a direct effect on my loan?

Yes, absolutely! Sellers and agents aren't stupid, and will want to see that you have enough extra money to pay the difference. Also, they will double-check your file to ensure your loan will still be in healthy shape if the value came in less.

For example:

If you are putting 10% down on a 1M home (100,000) and you only have 125,000 in the bank. Maybe you could cover a shortfall with the appraisal of 25,000, however the lender might not be comfortable with you using every single penny you have to your name. Most lenders require a “rainy day fund” called “reserves” which protects both you and them if you were to get hit by a bus and be out of work for 2-6 months.