You write an offer for $350,000. The appraisal comes back at $340,000. Your lender will only finance 80% of $340,000 = $272,000. You signed a contract for $350,000, so you now owe the seller $10,000 out of pocket to make up the difference, or you negotiate a price reduction.
This is the appraisal gap — and it's becoming more common as offers overshoot value in hot markets.
Why Appraisals Come in Low
Most appraisers work on comparative market analysis (comps). They look at similar homes sold recently in the neighborhood. If your offer was $50,000 above what similar homes sold for, the appraiser has no choice but to value it lower.
In competitive markets, buyers overbid. Appraisers stay grounded in reality.
Your Options When the Appraisal is Low
Option 1: Renegotiate with the seller. Ask them to lower the price to match the appraisal. Many sellers will; they don't want the deal to blow up either. Especially in slower markets or if they're motivated (divorce, relocation, etc.).
Option 2: Bring more cash. If you only planned 5% down, bring 10% and make up the gap. The lender will finance based on the appraised value, and your larger down payment covers the difference.
Option 3: Appeal the appraisal. If you believe the appraiser erred (missed comps, didn't account for recent upgrades), your realtor or lender can request a formal appeal. Success rates vary; this isn't a hail mary.
Option 4: Appraisal gap insurance (new in 2022). Some title companies and specialty insurers now offer appraisal gap insurance — you pay $400–$800 upfront as an insurance premium, and if the appraisal comes in low by more than a certain amount (usually 2–5% of the offer), the insurer pays the gap up to a cap (usually $10,000–$25,000). This is growing market, especially for first-time buyers.
The Bigger Picture
Appraisal gaps are a symptom of a hot offer market. If you're routinely bidding $20,000+ over appraisal value, you're overpaying. Full stop.
Before you write an offer, compare it to recent closed comps in the neighborhood. If the comps say $340,000 and you're offering $360,000, you're not getting a deal — you're catching a falling knife.
Use your First-Time Homebuyer Mortgage Calculator to stress-test your down payment for multiple scenarios: what if the appraisal is $10k lower? What if it's $20k lower? Plan for that gap before you make an offer.