What Is Appraisal Gap?
An appraisal gap occurs when a property appraises for less than the agreed purchase price, leaving the buyer to cover the difference in cash, renegotiate, or walk away if an appraisal contingency allows it.
Advanced Explanation
An appraisal gap is the amount by which the contract price exceeds the appraised value. Because lenders base the maximum loan on the lower of price or appraised value, the gap typically has to be covered with additional cash, a price reduction or another contract remedy. Some contracts include an appraisal-gap clause in which the buyer agrees in advance to cover a gap up to a stated amount.
Example
A home under contract for $420,000 that appraises at $400,000 has a $20,000 appraisal gap — the lender will only base financing on the $400,000 appraised value.
Why It Matters
In competitive markets, buyers sometimes waive the appraisal contingency or agree in advance to cover a gap up to a set amount to make their offer more competitive — understanding this risk before offering matters.