What Is Appraisal Gap?
An appraisal gap is the amount by which a home's contract price exceeds its appraised value. It arises when the lender's appraisal comes in low, and matters because the lender lends on the lower value, so the buyer must cover the difference in cash, renegotiate, or cancel if a contingency allows it.
Appraisal Gap in plain English
An appraisal gap is the difference between the price you agreed to pay and the value the lender's appraiser assigns. If you agree to $420,000 and the home appraises at $400,000, the gap is $20,000.
Lenders lend based on the lower of the two numbers, so the gap usually has to be covered with extra cash or a new agreement with the seller.
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.
Formula
Appraisal Gap = Contract Price − Appraised Value- Contract Price
- The price in the signed purchase agreement.
- Appraised Value
- The value in the lender's appraisal report.
The extra cash needed can differ from the gap, because the loan amount falls with the appraised value (see the worked example).
Worked example
A $20,000 appraisal gap with 20% down
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Contract price
- $420,000
- Appraised value
- $400,000
- Loan program
- 80% LTV (no mortgage insurance)
| Step | Calculation | Result |
|---|---|---|
| 1. Appraisal gap | $420,000 − $400,000 | $20,000 |
| 2. Loan the buyer planned | $420,000 × 80% | $336,000 |
| 3. Largest loan at 80% of the appraisal | $400,000 × 80% | $320,000 |
| 4. Cash needed now (price − loan) | $420,000 − $320,000 | $100,000 |
| 5. Extra cash versus the plan | $100,000 − $84,000 | $16,000 |
Extra cash to close at the contract price: $16,000. To keep the price and stay at 80% LTV, the buyer needs $16,000 more cash. The alternatives are to renegotiate the price, split the gap with the seller, accept a higher LTV with mortgage insurance, or - with an appraisal contingency - cancel.
What this calculation leaves out
- Closing costs are extra and not shown.
- Whether the buyer can cancel and recover the deposit depends on the contract and its deadlines.
Try it: Appraisal Gap with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
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.
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.
The cash needed is not always the same as the gap. Because the loan shrinks with the appraisal, a buyer keeping 80% LTV needs to replace the lost loan amount - $16,000 on a $20,000 gap in the example - on top of the original down payment.
What it means for you
Who pays?
Negotiable - the buyer, the seller or both. The contract determines whether either party must.
What happens if something goes wrong?
If no one covers the gap and there is no contingency, the buyer may be unable to close and could lose the deposit.
What buyers should know
Before offering above recent sales, decide how much gap you could cover in cash and still keep reserves.
What sellers should know
A buyer's gap clause or large down payment reduces the risk that a low appraisal derails the sale.
Common mistakes
- Waiving the appraisal contingency without having the cash to cover a gap.
- Agreeing to an unlimited gap clause instead of a capped amount.
- Assuming a second appraisal will come in higher.
Compare and common questions
Appraisal Gap: frequently asked questions
What happens when the appraisal is lower than the offer?
The lender bases the loan on the lower appraised value, so the buyer must make up the difference, renegotiate, or cancel if the contract allows. Many deals are saved by splitting the gap.
Who pays the difference?
Whoever agrees to: the buyer can bring more cash, the seller can lower the price, or both can split it. The contract decides who has to, if anyone.
Can the buyer renegotiate after a low appraisal?
Yes. A low appraisal is common grounds to ask for a price reduction, especially when the contract has an appraisal contingency. The seller may accept, counter or refuse.
Can a deal be canceled because of a low appraisal?
Yes, if the contract has an appraisal (or financing) contingency and the buyer acts before its deadline; the buyer then typically recovers the earnest money. Without one, cancelling may put the deposit at risk.
What is an appraisal gap clause?
A contract provision in which the buyer agrees in advance to cover a gap up to a stated amount. It makes an offer stronger but commits the buyer's cash.
Related Terms
Where it fits
- Buying a home, Appraisal: before this, Appraised Value; next, Appraisal Contingency.
More Buying Terms
Recommended next step
Set an offer and a gap limit you can actually cover.
Offer price calculator →Apply it to a specific property: Comparable sales analysis.
Sources and review
- What is a loan-to-value ratio and how does it relate to my costs?, Consumer Financial Protection Bureau. Supports: Lenders measure the loan against the appraised value.
Where this applies: United States. Amounts, deadlines and remedies are set by the purchase contract and state law, which vary; confirm with your agent or a real estate attorney.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
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.
Understand a property's costs and risks before you make an offer
Use the free calculator for your own numbers, or analyze a specific home before you commit.
- Free calculatorOffer Price Calculator →Runs in your browser; nothing to sign up for.
- Paid reportHome Buyer Decision Report →Evaluate a home before making an offer. Price shown before checkout.
Or analyze a specific property: Essential Property Analysis, $19 · Property Decision Analysis, $49 · Professional Property Analysis, $99. You choose the depth before you pay.