One of the most misunderstood parts of the homebuying process is something called an appraisal gap.
This happens when the home appraises for less than the contract purchase price.
What Is an Appraisal Gap?
An appraisal is an independent estimate of a home’s value. If the appraisal comes in lower than the agreed purchase price, there is a gap between:
- What the lender is willing to finance
- What the buyer agreed to pay
Example Scenario
If a buyer contracts a home for $300,000 but it appraises for $290,000, there is a $10,000 appraisal gap.
Lenders typically base financing on the lower of the purchase price or appraised value.
How Buyers Can Handle It
There are a few common options:
- The seller reduces the price
- The buyer brings additional cash to cover the difference
- Both parties negotiate somewhere in the middle
- The contract is renegotiated or canceled (depending on terms)
Why Appraisal Gaps Are More Common Now
In competitive markets, bidding above asking price is more common, which increases the chance of appraisal differences.
The Key Takeaway
Appraisal gaps don’t always kill deals — they just require negotiation and communication between all parties involved.