Low Appraisals/Appraisal Gaps: What You Should Know
So, you’re buying a house. You crunched the numbers and you’re ready to nail this purchase. There’s just one issue: the appraisal reflects a lower value than your offer.
This is called an appraisal gap. What does it mean for your home buying journey? Let’s walk through it.
Why does an appraisal gap matter?
Typically, a lender only approves a home loan for the amount reflected in the appraisal* (possibly less if you have to make a down payment on the home). So if your offer goes above that amount, the difference will have to come from your own pocket. If the gap is significant (what’s considered significant will depend on your unique financial situation), you may not have enough savings to make up the difference.
*Your appraisal is the value of the home as determined by an unbiased third party. You can learn more in our (really exciting) mortgage glossary.
If your first question when you get a low appraisal is, “Why is this happening?” you’re not alone. Let’s take some pain out of the process and break down why low appraisals happen.
What causes a low appraisal?
The biggest factor in a low appraisal is unfortunately one that you can’t do much about: the housing market.
The housing market fluctuates through cycles that work to the advantage of either the seller or the buyer. In a seller’s market, there’s a high demand for real estate, prices rise, and homes move off the market quickly. In a buyer’s market, you guessed it—the opposite is true. Demand is down, prices are lower, and that house you’ve been eyeing will probably still be there later if you need to wait before making an offer.
As of 2021, the housing market in the U.S. favors sellers. It’s this kind of market that often leads to appraisal gaps. Buyers have to make higher offers to stay competitive, but as offers rise the appraisal value won’t necessarily rise to match it.
Human error can also cause a low appraisal. You may be dealing with an inexperienced appraiser or the seller might let sentimental value get the best of them when pricing the house, leading to offers based on an overestimated asking price.
Now that you know why the appraisal is lower than the offer, let’s see what you can do about it.
What can I do if the appraisal is lower than the offer?
There are a few ways you can handle a low appraisal:
Pay the Difference
If you’re comfortable putting down more money, you can simply pay the full difference between the appraisal value and your offer, plus any required down payment.
Negotiate a Lower Offer
If the seller seems open to a lower offer, it doesn’t hurt to ask. You’ll probably end up somewhere in the middle rather than a fully lowered price to match the appraisal.
In a competitive market, the seller has a good chance of getting a higher offer from someone willing to cover the gap if you decide not to. If that’s the case, it’s unlikely they’ll be motivated to negotiate a lower price.
Dispute the Low Appraisal
If you don’t have the flexibility to lower your offer, you can try moving the needle on the appraisal value instead. This is a more complicated and typically less successful route, so you should try to work things out with your seller first if possible.
You can dispute the first appraisal by having your real estate agent create a list of comparable sales (recent sales of similar homes in the same market). If the appraisal value is lower than what these comparable homes sold for, you can use this to prove your offer is closer to the true market value than the appraisal.
Another option is to request a second appraisal. You’ll have to cover the cost of this appraisal yourself and there’s no guarantee that it will come back higher or be accepted over the first. If there are proven errors in your first appraisal, the first step is to have them fixed and the first appraisal updated. So, a second appraisal is usually only a last resort that may be approved if the underwriter determines that the errors in the first appraisal weren’t sufficiently corrected after being disputed.
If the appraisal gap is too high and you can’t reach an agreement with your seller, it might be time to walk away (without explosions in the background, please). Just be aware you might still encounter an appraisal gap with your next home.
To cancel with no penalties, you’ll need an appraisal contingency in your purchase contract. An appraisal contingency is a provision that allows you to back out of a transaction if the appraisal value is lower than the offer. Without a contingency, you’ll lose your earnest money deposit when you cancel.
Key takeaways about low appraisals/appraisal gaps
Whew—we just covered a lot of ground. While you rehydrate, here’s a gap recap:
- An appraisal gap happens when the appraisal value is less than your offer
- Appraisal gaps are common in competitive markets
- Appraisal gaps matter because your lender only covers up to the appraisal value (less if a down payment is required)
- You can dispute a low appraisal
- You can pay the difference yourself
- You can meet in the middle with your seller to reach a lower appraisal gap
- You can walk away with no penalties if you have an appraisal contingency
When you’re ready to put your new-found knowledge to use and start the purchase process, our team is here to help.
If you’re facing an appraisal gap, you can pay the difference, negotiate a lower offer, or dispute the first appraisal.