Why Appraisal Gaps Can Jeopardize Your Home Purchase

Answer

An appraisal gap occurs when a lender’s appraisal of a property comes in below the agreed purchase price. In a competitive U.S. real estate market, buyers may offer more than the listing price to win a bid—but if the appraisal doesn’t support that number, the “gap” between loan amount and sale price can create financing challenges.

Here’s how an appraisal gap typically unfolds:

• Offer Accepted: Buyer and seller agree on a price, often above list in hot markets.
• Appraisal Ordered: Lender hires an appraiser to assess fair market value based on comparable sales and property condition.
• Low Valuation: Appraiser’s report comes in below the contract price—this shortfall is the appraisal gap.

The size of an appraisal gap varies widely. In fast-moving metro areas, gaps of 2–10% above appraisal are not unusual. Buyers can cover the difference by:

• Bringing Extra Cash: Paying the gap in cash at closing to satisfy the seller’s price.
• Renegotiating: Asking the seller to lower the price or share the difference.
• Waiving the Appraisal Contingency: Accepting full risk that lender will still cap financing to the appraised value.

Each option carries trade‑offs. Covering the gap in cash increases out‑of‑pocket costs. Renegotiation may not succeed in a seller’s market. Waiving contingencies speeds the deal but can lead to funding shortfalls if the lender won’t approve the higher loan.

To minimize appraisal risks, buyers are recommended to:

• Order a Pre‑Listing Appraisal: Work with an appraiser before writing an offer.
• Include a Gap Clause: Specify in your contract how much over appraisal you’ll cover (e.g., “buyer to pay up to $10,000 over appraised value”).
• Review Comps Carefully: Ensure the sales your agent uses as comparables truly match your property’s size, age, and condition.

Appraisal gaps can derail a deal if unaddressed, so it’s advisable to discuss strategies with your lender and real estate agent early. Before finalizing any offer, buyers should consult their loan officer about financing limits and verify local market trends via sources like the National Association of REALTORS®. For tailored legal or tax guidance, it’s advisable to consult a licensed attorney or tax professional.