What Is Appraisal Contingency?
An appraisal contingency lets a buyer renegotiate or cancel a purchase contract if the property appraises for less than the agreed purchase price.
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Appraisal gap: four ways to handle a low appraisal
Lenders base the loan on the lower of the price and the appraisal. When the appraisal is lower, someone has to cover the difference.
- Appraisal gap
- $20,000
- Price is above the appraisal
- Planned loan and cash
- $336,000
- $84,000 cash planned
- Cover the gap in cash, keep the LTVExtra cash: $16,000 · LTV 80.0%
Same loan-to-value as planned; all of the extra comes from your savings.
- Keep the planned loanExtra cash: $0 · LTV 84.0%
Less extra cash, but the LTV rises - it may add mortgage insurance or need lender approval.
- Split the gap with the sellerExtra cash: $6,000 · LTV 80.0%
Seller lowers the price by half the gap; you cover the other half.
- Price reduced to the appraisalExtra cash: $4,000 less · LTV 80.0%
Only if the seller agrees, or the contract's appraisal contingency gives you that right.
Show the numbers as a table
| Option | Price | Loan | Cash for price | Extra cash | LTV |
|---|---|---|---|---|---|
| Cover the gap in cash, keep the LTV | $420,000 | $320,000 | $100,000 | $16,000 | 80.0% |
| Keep the planned loan | $420,000 | $336,000 | $84,000 | $0 | 84.0% |
| Split the gap with the seller | $410,000 | $320,000 | $90,000 | $6,000 | 80.0% |
| Price reduced to the appraisal | $400,000 | $320,000 | $80,000 | −$4,000 | 80.0% |
Formula
Appraisal gap = Contract price − Appraised value (if positive)LTV = Loan ÷ Lower of price and appraised value × 100Assumptions
- Closing costs are left out; they do not change the comparison.
- Keeping the planned loan raises the LTV; the lender must approve it and mortgage insurance may apply above 80%.
- An appraisal contingency or appraisal-gap clause in the contract decides who must act.
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This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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