What is Appraisal Gap?
An appraisal gap is the difference between a home's appraised value and the higher purchase price a buyer agreed to pay, which the lender will not finance.
An appraisal gap arises when the appraised value of a property comes in lower than the agreed-upon purchase price. Lenders base mortgage financing on the lesser of the purchase price or appraised value, so the buyer must cover the difference in cash or renegotiate. Borrowers encounter this in competitive markets where offers exceed appraised values. Watch for the need to bring extra funds to closing, the possibility of losing earnest money if financing falls through, and whether your contract includes an appraisal contingency. Some buyers add an appraisal gap clause specifying how much extra they will pay if the appraisal is low.
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