An appraisal is a key step in the homebuying process because it provides a non-affiliated, independent expert’s opinion of a property’s value. Lenders rely on this figure to confirm the home is worth the amount they are lending. In some cases, the appraisal matches the purchase price exactly, while in others it is valued higher or lower. If it comes in higher, the buyer gains instant equity. If it comes in lower than the agreed-upon purchase price, the shortfall is known as an appraisal gap, and it can create challenges for both the buyer and the seller.
When an appraisal comes in low, the lender will only base the loan amount on the appraised value, not the contract price. This means the buyer must either cover the difference out of pocket, renegotiate the price with the seller, or potentially walk away from the deal. For example, if you agree to buy a home for $300,000 but the appraisal is $290,000, your lender will only lend based on $290,000. That $10,000 shortfall has to be addressed before closing.
Appraisal gaps often occur in competitive markets where buyers bid over asking prices to secure a home. They can also happen if there are limited comparable sales in the area or if the property has unique features that are hard to value. In these situations, preparation is key. Discussing the possibility of an appraisal gap with your loan originator before you make an offer can help you determine how much flexibility you have.
One way to protect yourself is to include an appraisal contingency in your purchase agreement, which allows you to renegotiate or cancel the contract if the appraisal is low. Another option is to have extra funds set aside to cover a potential gap. While no one likes the idea of bringing more money to closing, being prepared can help prevent delays or a lost opportunity.
An appraisal gap does not have to derail your home purchase, but it is important to understand how it works and how to prepare for it. Contact your Ellason Mortgage Group loan originator today to discuss your options for handling an appraisal gap and to ensure you are ready for every step of the buying process.
