What home buyers need to know about appraisal gaps

Contributed by Tom McLean

Jul 31, 2025

7-minute read

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The appraisal is an essential step in getting a mortgage to buy a home. It involves an independent professional reviewing the home and the market to provide an unbiased estimate of its value. Mortgage lenders require a home appraisal to confirm that the home's value justifies the loan amount. If the home appraises for less than expected, it’s called an appraisal gap, which can stall the home buying process. Understanding the concept of an appraisal gap and its implications can make buying a home easier and less stressful.

What is an appraisal gap?

An appraisal gap is when the fair market value of the home is less than the amount you’ve agreed to pay for the home. The fair market value is based on an unbiased and objective assessment of the property’s condition and features, as well as historical sales prices of other homes in the neighborhood.

An appraisal gap can disrupt a home sale, but it can be overcome. You most likely will need to find a way to make up for the difference, as your mortgage lender won’t lend you more than the home appraises for.

For example, if you’ve agreed to pay $450,000 for a home and it was appraised at $425,000, you’ll have to find a way to make up the $25,000 difference.

Another option is to work with the seller to come up with an agreement you’re both happy with.

What’s the appraisal guarantee clause?

An appraisal guarantee clause is a stipulation in the purchase and sale agreement stating that it’s the buyer’s responsibility to fund the difference if the appraisal comes in lower than the accepted purchase price. Buyers could stipulate a specific percentage or dollar amount they’re willing to pay if there is an appraisal gap.

This clause is common in a seller’s market, where buyers may need to submit more competitive offers to win a bidding war for a home.

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How the home appraisal process works

The appraisal process entails a licensed appraiser evaluating the home’s features, condition, and the local market to estimate the home’s fair market value.

When assessing the fair market value of a home, the appraiser will conduct a thorough walkthrough of the property. This step involves determining the features of the home, including the number of bedrooms and bathrooms, square footage, and the property’s exterior. The appraiser will then conduct research in the neighborhood and examine the sales prices of comparable homes sold in the area. 

An appraisal is an important part of the home closing process as mortgage lenders usually require one. Lenders want to be sure that in the event you default on the loan, they can recoup the cost.

A home appraisal also helps to protect you as the buyer. Reading through an appraisal report will offer you insight as to whether the amount you’ve agreed to pay for the home is on par with the fair market value.

Think about it: if you overpay for a home, you’re at risk of having negative equity. You may need to work harder to establish positive equity, or the amount of the home you own outright.

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What do appraisers look at?

An appraiser focuses on the home’s condition and comparable sales, also known as comps, when determining a fair market value.

This professional will examine the home’s interior and exterior and mark down the features, including:

  • Age and overall condition
  • Construction materials used on the home
  • Damage to the home
  • Home’s location and amenities
  • Number of bedrooms and bathrooms
  • Any applicable special features, such as if it’s a historical home or has a swimming pool
  • Improvements made to the home, like a new roof, energy-efficient windows, and new plumbing
  • Lot size
  • Square footage
  • Zoning restrictions

An appraiser also will share publicly available data for similar homes in the area that have sold within the past six months or so. Comparable homes have similar features to help the appraiser assess a fair market value.

Most completed reports follow the Uniform Residential Appraisal Report created by Fannie Mae. The report outlines the steps the appraiser took to complete their evaluation, including reviewing the home’s local market conditions.

The beginning of the document will display the home’s address and its appraised value. The remainder of the pages will show in detail how the appraiser came up with the final appraised value. For example, the appraiser may have adjusted the value based on the home’s basement or its functional utility.

Appraisal gap coverage vs. appraisal contingency

Appraisal gap coverage Appraisal contingency
Protects buyer if there is an appraisal gap Could make a buyer’s offer more competitive in a seller’s market
Buyer agrees to pay for the difference between appraisal value and the purchase price, which could be up to a certain amount Buyer can renegotiate the purchase price or back out of the purchase
Typically used in a seller’s market Typically used in all types of real estate markets
Could pose more risk as the buyer is on the hook for the difference It may be less risky since you can opt out of the purchase if certain conditions aren’t met

Appraisal gap coverage is a clause in your purchase and sale agreement that stipulates you’ll buy the home even if the appraisal comes in low. An appraisal contingency is a clause allowing you to back out of the home purchase if there is an appraisal gap and retain your earnest money deposit.

Say the purchase price is $500,000, and the home appraised for $425,000. If your purchase contract featured an appraisal gap coverage, you’re on the hook for the $75,000 difference. Whereas if your contract has an appraisal contingency, you can cancel the sale if you’re not willing to make up for the difference or if the seller isn’t willing to renegotiate the price.

You can put both appraisal gap coverage and an appraisal contingency in your purchase and sale agreement. The agreement could stipulate that you, the buyer, are willing to pay up to a certain amount of the difference between the purchase price and the appraised value. If the difference is higher than the specified amount, you have the right to legally back out of the deal.

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What should you do when the appraisal is less than the offer?

When an appraisal comes in less than the purchase price, you have several options, including renegotiating the price, paying the difference, or walking away from the home sale altogether. Understanding which option is best for you means you’re not committing to a decision that could cost you more than you can afford or are willing to pay.

Renegotiate the offer

The seller may be willing to negotiate a lower purchase price with you. Speak with your real estate agent to submit a request for the seller to lower the price to the fair market value. Doing so will eliminate the appraisal gap and help you secure financing with your mortgage lender. Another plus is that you don’t have to scramble to make up for the difference.

Consider carefully how much you want to buy the home, as there is a chance that the seller is unwilling to lower the purchase price. You could meet them halfway by offering to pay up to an amount that’s higher than the appraised value.

In a seller’s market, you may have less wiggle room to negotiate. Purchase contracts that have a kick-out clause mean that the seller could accept another purchase offer if they don’t like yours after you’ve removed your appraisal contingency.

Pay the difference

If you really want the home, it may make sense to pay the difference out of pocket, plus your down payment. Say the appraisal gap is $25,000 and the down payment is $10,000. You’ll need to come up with $35,000. This amount doesn’t include any additional closing costs that your lender may require.

These additional costs mean that your cash to close, or total amount of money you’ll need, will be much higher

You do have several options, one of which is tapping into your retirement accounts.  First-time homebuyers can withdraw up to $10,000 from their Roth IRA without paying penalties if they meet specific criteria. If available, you could borrow from your 401(k) account

Withdrawing funds from your retirement accounts can have significant consequences. One of the major ones is losing out on the potential for your retirement account balances to grow over time. You may also need to pay taxes on the amount you withdraw.

Your family may want to help by providing you with funds to cover the difference. If so, be sure to have them draft a gift letter so that the lender knows exactly where the funds originated.

Dispute the appraisal

You may be able to dispute the appraisal report if you disagree with the result and ask the appraiser to reassess the fair market value. The dispute process is called a reconsideration of value.

To request an ROV, you’ll need to provide evidence that the appraiser used inaccurate data. Some examples include using inappropriate comparable home sales or failing to include valuable features or upgrades in their estimate of the home’s value.

It could also be the case that you found mistakes in the report, which could have led to an inaccurate appraisal.

Submit your dispute in writing and include why you’re disputing the appraisal and documentation to back it up.

Walk away from the sale

If you have an appraisal contingencyin your purchase and sale agreement, you can back out of the purchase. Perhaps the seller wasn’t willing to budget on the purchase price, or you don’t want to pay more for a home than it’s worth.

While it may seem like you’ve wasted time going through the process, it may be better than sticking with a purchase that you can’t realistically afford.

You can still back out of a house offer even if you don’t have an appraisal contingency. However, you may lose your earnest money. Though rare, a seller could pursue legal action.

When is an appraisal gap coverage clause necessary?

It may be worth considering appraisal gap coverage and waiving the appraisal contingency if you face a competitive seller’s market. This clause could help your purchase offer stand out, as it may demonstrate your willingness to buy the house even if it is assessed for less.

Since sellers want some reassurance that accepting your offer is their best option, an appraisal gap coverage could be a significant deciding factor. Especially so if many buyers come in with offers at a similar purchase price.

The bottom line: Be prepared to navigate the appraisal gaps

Part of navigating the home buying process successfully is to learn about potential roadblocks ahead of time. An appraisal gap is one of them. The reality is that the home you want to buy could end up being appraised for less than the purchase price. You want to know how you can protect your best interests if that happens.

Getting started on your home buying journey? Get your mortgage approval process started today with Rocket Mortgage® and take advantage of our many features, including online tools to help you get closer to getting the keys to your new home. 

Sarah Li Cain is an Accredited Financial Counselor® and a finance and business writer. Her work has appeared in publications such as Fortune, CNBC Select, Zillow, and Kiplinger.

Sarah Li Cain

Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.