Appraisal gap: what to do when the home appraisal comes in low
You offered $350,000 to win the house, and the appraiser says it is worth $335,000. That $15,000 difference is an appraisal gap, and someone has to deal with it before the loan can close. Here is how the math works, the five ways buyers and sellers solve it, and what the standard Illinois and Wisconsin offer forms say about it.
Home State Bank mortgage teamCrystal Lake, IL · Appleton, WI · NMLS 478452Updated September 20, 20267-minute readWhat an appraisal gap is, and why the lender cares
An appraisal gap is the difference between the price in your contract and the value an independent appraiser puts on the home. It shows up most in competitive markets, where buyers bid past the most recent comparable sales and the appraiser, who has to work from closed sales, cannot follow them all the way up.
The gap matters because lenders size the loan on the lower of the purchase price or the appraised value. If you planned on 10% down, the lender will lend 90% of the appraised value, not 90% of the price. The contract price has not changed, so the missing dollars become cash you have to bring, unless the deal itself changes.
A worked example: how a low appraisal changes cash to close
Take a $350,000 contract in Cary or Kaukauna with a planned 10% down payment, and an appraisal of $335,000. Closing costs and prepaid items are left out so the comparison stays clean. These are illustrations, not quotes.
| Scenario | Price paid | Loan amount | Down payment cash |
|---|---|---|---|
| Original plan (appraisal at price, 10% down) | $350,000 | $315,000 | $35,000 |
| Buyer covers the full gap, keeps 10% down on value | $350,000 | $301,500 | $48,500 |
| Buyer covers the gap but drops to 5% down on value | $350,000 | $318,250 | $31,750 |
| Seller reduces the price to the appraised value | $335,000 | $301,500 | $33,500 |
| Buyer and seller split the gap | $342,500 | $301,500 | $41,000 |
Your five options when the home appraisal came in low
None of these is automatically right. The best choice depends on how much cash you have, how much you want this house, and how much leverage the seller has.
- Renegotiate the price. A seller who goes back on the market will likely face the same appraisal problem with the next financed buyer, and that is real leverage.
- Cover the gap in cash, in full or in part. Gap money is on top of your down payment and closing costs, and the lender will need to see where it came from.
- Split the difference. The most common outcome we see: the seller comes down part of the way and the buyer brings the rest.
- Ask for a reconsideration of value if the appraisal has real errors or missed better comparable sales.
- Walk away, if your contract has an appraisal contingency or a financing contingency that covers it. Check your deadlines with your agent or attorney before you rely on this.
Reconsideration of value: the formal way to challenge an appraisal
Since 2024, Fannie Mae, Freddie Mac, and FHA have required lenders to have a standard process for a borrower-initiated reconsideration of value, usually shortened to ROV. When we send you a copy of your appraisal, we also send a disclosure that explains how to ask for one.
Under Fannie Mae's rules, your request identifies the specific parts of the report you believe are wrong or unsupported and may include additional data or up to five comparable properties, with the source for each. Only one borrower-initiated ROV is allowed per appraisal. The lender reviews the request, sends it to the appraiser in a standard format, and the appraiser either revises the report or explains why the value stands.
An ROV works when there is a factual problem: the wrong square footage, a missed bedroom, a finished basement left out, or a closer and more recent sale the appraiser did not use. It does not work as an argument that the house is worth more because three people bid on it. Your real estate agent is usually the best source for the comparable sales.
Appraisal gap coverage clauses and the appraisal contingency
An appraisal gap coverage clause is a promise in your offer to pay some amount over the appraised value, usually with a cap, such as up to $10,000. It makes a financed offer look more like cash to a seller. It is also a commitment to bring real money, so never write a number you do not have in the bank after your down payment, closing costs, and a cushion.
In Wisconsin, the state-approved WB-11 Residential Offer to Purchase includes an optional appraisal contingency. If it is selected and the appraisal comes in below the price, the buyer delivers the report and a written objection by the deadline in the offer. If the seller has the right to cure, the seller can keep the deal alive by lowering the price to the appraised value, within five days unless the offer says otherwise. If the seller cannot or will not, the offer becomes null and void. The form also notes that an FHA, VA, or USDA amendatory clause may supersede the contingency.
In northern Illinois, most purchases are written on the Multi-Board Residential Real Estate Contract. Its financing paragraph conditions the deal on loan approval, and appraisal terms are commonly handled through that paragraph or a separate appraisal addendum. Gap language is typically added by your agent or during attorney review. In either state, have your agent or attorney confirm exactly what your contract says before you waive anything.
Where a portfolio lender can and cannot help
A low appraisal is a value problem, and no lender can simply ignore the value of its collateral. What a portfolio lender can sometimes do is solve the problems that travel with it. Because Home State Bank can keep loans on its own books, we can look at structures the secondary market will not buy: an unusual property where the comparable sales are thin, or a bridge loan that frees up equity from your current home so you have the cash to cover a gap.
None of that is automatic, and every file is underwritten on its own merits. The practical advice is simple: call your loan officer the day the appraisal arrives. Contract deadlines for objecting to a value are short, and the options are widest at the start.
Questions people ask
- Who pays the appraisal gap, the buyer or the seller?
- It is negotiable. The buyer can bring extra cash, the seller can lower the price, or the two can split it. What your contract says about an appraisal contingency or appraisal gap coverage decides how much leverage each side has.
- Can I back out if the appraisal is low?
- Often yes, if your contract includes an appraisal contingency or a financing contingency that covers a low value, and you act within its deadlines. FHA and VA purchases also include an amendatory or escape clause tied to the appraised value. If you waived those protections, backing out may put your earnest money at risk.
- Can I use a gift to cover an appraisal gap?
- In many cases, yes. Gift funds from an eligible donor can usually be used toward the cash you need to close, subject to the rules of your loan type and a proper gift letter. See our guide to gift funds for a down payment.
- How often does a reconsideration of value change the appraisal?
- It depends entirely on the evidence. Requests that document factual errors or clearly better comparable sales sometimes succeed. Requests that only argue the price was fair rarely do.
- Does a low appraisal affect a cash buyer?
- A cash buyer does not need an appraisal at all, which is one reason cash offers win. A financed buyer can narrow that advantage with a strong pre-approval and a capped appraisal gap clause they can truly afford.
Sources
This article is general information, not financial, tax, or legal advice, and not a commitment to lend. Program terms, limits, and rates change; confirm current figures with a loan officer. Home State Bank, N.A. NMLS 478452. Member FDIC · Equal Housing Lender.
