What Is an Appraisal Gap?

An appraisal gap is when the home you want to buy appraises for less than the price you agreed to pay. Since mortgage lenders base your loan amount on the appraised value, not the purchase price, a low appraisal may mean being approved for less than you need to finance the purchase. When this happens, you have a few options. You can make a larger down payment to cover the difference between the appraised value and your loan amount, renegotiate the terms of the agreement with the seller, or walk away from the deal.

While an appraisal gap can feel stressful, it doesn’t have to derail your home purchase. In this guide, we’ll cover why gaps happen, your options for handling them, who typically pays, and how to protect yourself with gap coverage or contingencies.

Why does an appraisal gap occur?

Appraisal gaps occur when your agreed purchase price exceeds the appraiser’s valuation. Here’s how this situation may develop:

1. You make an offer on a home at a specific price.
2. The seller accepts your offer, creating a binding contract.
3. Your lender orders an appraisal to determine how much they’re willing to loan you (lenders won’t lend more than a home’s appraised value).
4. The appraiser evaluates the home and determines it’s worth less than your agreed purchase price.
5. You have an appraisal gap, where you’re contractually committed to pay the higher price, but your lender will only finance the lower appraised amount.

What causes appraisals to fall short?

Several factors can create this mismatch between your offer and the appraised value. In competitive markets, buyers bid against each other and drive offers above what similar homes recently sold for. Appraisers can only use actual sales data from the past few months, so they can’t account for the premium you’re willing to pay in a bidding war.

Limited recent sales data also creates problems. Appraisers need recent sales of similar homes to determine how much a home is worth, but if few comparable homes have sold in the neighborhood recently, they may have to rely on sale prices that don’t reflect current market demand. Property-specific issues can also affect valuations. Homes with deferred maintenance, unusual layouts, or location challenges may not appraise as high as the contract price suggests, regardless of market conditions. 

How to handle an appraisal gap

When facing an appraisal gap, you have three main options: Renegotiate the price with the seller, pay the difference in cash, or dispute the appraisal. Here’s how each approach works:

Renegotiate the purchase price 

Ask the seller to lower the contract amount to the appraised value, eliminating the gap entirely.  This strategy works best in balanced or buyer-friendly markets where sellers may be more willing to compromise.

Pay the difference in cash 

Cover the gap out of pocket to keep the deal moving forward. This increases your total cash to close, since you’ll need to fund both the appraisal shortfall and your original down payment.

Appeal the appraisal 

If you believe the appraised value is too low, you can request a reconsideration of value. This involves providing evidence, such as additional comparables, to support a higher valuation. Those comps can be difficult to come by, however, even for your real estate agent. If you go this route, know that the reconsideration of value might not be successful.

A summary of your options when facing an appraisal gap as a buyer

Who pays for an appraisal gap?

The buyer typically pays for an appraisal gap. Since lenders won’t approve financing above the appraised value, any shortfall between the appraisal and purchase price is the buyer’s responsibility.

However, sellers sometimes agree to concessions that help bridge the gap. They may lower the price to match the appraisal, or split the difference to keep the deal moving forward. Whether this happens depends largely on market conditions and individual sellers. In competitive sellers markets, buyers usually absorb the full gap themselves. In buyer’s markets, sellers may feel more pressure to compromise on price. Including a financing contingency in your offer can also protect you if your loan is denied after a low appraisal.

What is appraisal gap coverage?

Appraisal gap coverage is a contract clause stating you’ll cover some or all of the difference if the home appraises below your offer price. This provision reassures sellers that the deal will close even with a low appraisal, since funds are typically held in escrow until closing.

Including appraisal gap coverage in your offer

Appraisal gap coverage isn’t standard in purchase contracts — it’s an optional clause that buyers add to strengthen their offers in competitive situations. Your real estate agent can include this language when drafting your offer, specifying exactly how much you’re willing to cover above the appraised value.

You can structure coverage to limit your exposure. For example, committing to pay up to $10,000 over appraised value gives you a ceiling. If the appraisal comes in $25,000 lower, you’d only pay the first $10,000, leaving the seller to decide whether to adjust the price or risk losing the deal.

Risks of appraisal gap coverage

While appraisal gap coverage can strengthen your offer, it also increases your risk. You’ll need cash available beyond your down payment and closing costs. Make sure the home still aligns with your overall budget, even if you end up paying above the appraised value. 

Zillow’s Closing Cost Calculator can help you estimate the total cost of purchasing a home to help you plan a budget before you buy. Getting a mortgage pre-approval before making an offer can also confirm whether you have the financial flexibility to cover an appraisal gap if one arises.

Should I include an appraisal contingency in my offer on a house?

Yes, you should generally include an appraisal contingency in your offer to protect yourself from overpaying, though you may need to weigh this protection against competitiveness in hot markets.

An appraisal contingency protects you from overpaying by giving you the right to renegotiate or walk away if the home appraises below the contract price. While this type of financing contingency is common, it’s not always automatic, so be sure to check in with your real estate agent. According to Zillow’s 2024 Consumer Housing Trends Report, 52% of buyers said their final offer was contingent on the property appraising at a specific minimum price — highlighting how common this protection is.

In competitive markets, some buyers waive the appraisal contingency or replace it with gap coverage to make their offers more appealing. This strategy can help you stand out in multiple-offer situations, but it increases your financial risk if the appraisal comes in low.

The decision comes down to balancing competitiveness with protection. Buyers with substantial cash reserves who are determined to secure a specific home may benefit from gap coverage. Those prioritizing financial security and flexibility should keep the appraisal contingency in place.

Get a clearer picture of your finances

Understanding your budget limits before making an offer helps you decide which approach works best. Checking whether you pre-qualify for a mortgage with us at Zillow Home Loans* can clarify your options in as little as five minutes with no impact to your credit score. Whether you choose to include a contingency or not, appraisal gaps are common in competitive markets. Being prepared for either scenario helps you make confident decisions and move forward with your home purchase.

*Zillow Home Loans; an equal housing lender. NMLS #10287