Low appraisal: What happens next and buyer options

An appraisal is a critical checkpoint in the home buying process. When the appraiser's valuation falls short of your offer price, it creates an "appraisal gap" that can derail your transaction if left unresolved. Understanding what triggers a low appraisal and exploring your available options can help you navigate this common challenge and keep your home purchase on track.

Key takeaways:

• Lending limits are tied to appraised value, which means that a low appraisal limits how much you can borrow.
• If an appraisal comes in low, buyers can negotiate a price reduction, split the gap with the seller, bring additional cash to closing, challenge the appraisal, or cover the difference out-of-pocket.
• Having an appraisal contingency in your purchase contract allows you to renegotiate the price or walk away from the sale with your earnest money if an agreement cannot be reached.

What does a low home appraisal mean?

A low appraisal means that the appraised value of the home is lower than the purchase price that the buyer and seller agreed on. For example, let’s say you’ve agreed on a purchase price of $550,000. The appraisal came in at $510,000, meaning the appraised value is $40,000 less than the offer.

The appraisal provides a snapshot of the home’s current value based on the property’s characteristics, condition, and what prices similar homes nearby have recently sold for.

Mortgage lenders use the appraised value to calculate your loan-to-value (LTV) ratio. Because lenders limit their risk by basing loan amounts on the lower of the sale price or the appraised value, a low appraisal prevents the lender from financing the full contract amount.

How often do home appraisals come in low?

It’s not common for home appraisals to come in low, but it still happens. Industry data suggests that roughly 10% – 20% of appraisals come in below contract price, though this varies significantly by market conditions. Keep in mind that this is just an estimate and can vary by market, particularly in areas where home values increase or decrease more rapidly. Low appraisals occur more frequently in rapidly appreciating markets or during competitive bidding wars where buyers offer above recent comparable sales.

What is an appraisal gap?

An appraisal gap is the dollar difference between the agreed-upon purchase price in a real estate contract and the lower appraised market value established by the appraiser. When an appraisal gap occurs, a financial shortfall opens between what the seller expects to receive and what the lender is willing to finance. Because mortgage

Appraisal contingencies

A contingency is a condition listed in the purchase agreement that must be met for the deal to go through. If a contingency listed in the contract is not met, the buyer can walk away from the deal without penalty. If you have an appraisal contingency in your purchase agreement and the appraisal comes back low, you can cancel the deal and keep your earnest money deposit. If you walk away without an appraisal contingency, you’d forfeit the earnest money you put down with the offer.

Example of an appraisal gap

Suppose a buyer agrees to purchase a home for $400,000, planning to put 20% down ($80,000) and borrow $320,000. This leaves the buyer with an 80% LTV ratio.

If the appraisal comes back at $370,000, an appraisal gap of $30,000 exists between it and the purchase price of $400,000. The lender recalculates the maximum 80% LTV loan based on the $370,000 appraised value, lowering the maximum mortgage to $296,000.

To keep the original $400,000 purchase price, the buyer must now bring $104,000 to closing ($74,000 down payment + $30,000 cash shortfall) instead of the initial $80,000.

What happens if the appraisal is lower than the offer price?

If an appraisal comes in lower than the agreed-upon price, it complicates the closing process for both buyers and sellers. For buyers, it’s very likely your lender won’t approve a loan that’s large enough to cover the full purchase price.

When an appraisal falls short of the offer price, the transaction hits a temporary pause. A low appraisal directly affects:

• Maximum loan amount: The lender caps financing based on the lower appraised valuation.
• Cash to close: The buyer faces higher out-of-pocket expenses to cover the shortfall unless contract terms change.
• Closing timeline: Resolving the gap through negotiations or appeals typically delays the closing date.
• Contractual obligations: If the gap cannot be resolved and the contract includes an appraisal contingency, the buyer can terminate the agreement.

What causes low appraisals?

Several common market and property dynamics can hurt a home appraisal:

• Bidding wars: High buyer competition can push the final contract price beyond what recent historical sales in the neighborhood justify.
• Fast-changing markets: In rapidly appreciating areas, recent closed sales ("comps") may lag current real-time market values.
• Outdated or inaccurate comps: The appraiser may have selected comparable sales that differ significantly in size, location, or condition.
• Unaccounted home improvements: Significant upgrades or unpermitted renovations may have been overlooked or assigned lower value by the appraiser.
• Property maintenance issues: Deferred maintenance, structural concerns, or physical defects can drag down the appraised value.

What to do if you get a low appraisal

If your appraisal comes back low, you have several different options for how to proceed, depending on the contract, financing, available cash, and seller cooperation.

Try to renegotiate the purchase price

In a buyer’s market, supply outweighs demand, and the buyer holds more negotiating power. A motivated seller might be incentivized to renegotiate the purchase price, especially if they’re eager to sell their home. As a buyer, it can’t hurt to attempt to negotiate a new purchase price due to the appraisal results.

Split the difference with the seller

If the seller refuses to lower the price entirely, both parties can compromise by splitting the gap. For example, on a $20,000 appraisal shortfall, the seller might reduce the purchase price by $10,000 while the buyer brings an extra $10,000 cash to closing.

Make up the difference in cash

In a seller’s market, where sellers hold more negotiating power, they’ll have little incentive to lower their price in response to a low appraisal. Likely, the buyer will have to make up the difference in the purchase price and the loan amount the lender is willing to offer.

This can seem like a steep ask if you’re already nearing the top of your budget.  As a buyer, you should carefully evaluate the financial effects before using retirement or emergency funds, though this is an option. Be sure to consult your financial advisor before making any big decisions that may impact your finances down the road.

Another way to eliminate the appraisal gap is by tapping into your additional savings resources to increase your down payment amount. While it may not be ideal, in some cases, this could be the easiest option.

Ask whether a different loan structure could help

In some instances, buyers with larger down payments can absorb an appraisal gap by shifting their loan parameters. If you initially planned to put 20% down on a conventional loan, you might adjust your down payment percentage down to 15% or 10% and allocate the remaining cash toward the appraisal gap. However, this may require paying private mortgage insurance (PMI) until equity reaches 20%.

Use an appraisal contingency

If the buyer can’t come up with more cash and the seller won’t lower the price, the buyer may have no choice but to back out of the sale. If there’s an appraisal contingency in the purchase agreement and the appraisal comes in low, the buyer can back out of the sale without losing the earnest money deposit.

Walk away from the sale if needed

As a buyer, if you end up needing to walk away, know that it may be the best option in the long run. If the house isn’t worth what you’re willing to pay, you'd likely end up underwater on your mortgage for at least a period of time.

If you have an “underwater” home, it means the house is worth less than you owe on the mortgage. As a result, you’d still owe your lender money, and you wouldn’t make a profit even if you sold the house for its full value. You’d also likely have a hard time refinancing your home because the loan-to-value ratio (LTV) is too high.

How to challenge a low appraisal

If you and your real estate agent believe the appraisal report contains objective errors or missed key property details, you can challenge the valuation. However, in the absence of well-substantiated claims of an oversight, most lenders, including Rocket Mortgage, are unlikely to agree to a second request for an appraisal.

Review the appraisal report for errors

Carefully inspect the appraiser's written report alongside your agent. Look for factual inaccuracies, such as:

• Incorrect square footage, bedroom counts, or bathroom counts
• Missing property structures, like a garage, shed, or finished basement
• Overlooked interior or exterior upgrades
• Incorrect neighborhood boundary definitions

Evaluate the comps

Examine the comparable properties selected by the appraiser. Check whether the appraiser missed superior, recent closed sales located closer to the property or within the same school district. Gather 3 - 4 more relevant comparable homes in your area that support your contract price.

Submit a Reconsideration of Value

if your ROV demonstrates clear evidence of a deficient appraisal or material errors that the original appraiser refuses to fix, the lender may approve a second independent appraisal. Note that second appraisals add cost and can delay closing.

By submitting proof of the oversight and working together with the lender, your agent could get the closing process back on track, but your closing date might be delayed. If the lender grants a second appraisal, you’ll likely have to pay for an additional appraisal.

Request a second appraisal

Lenders operate under strict federal appraisal independence rules and generally will not order a second appraisal simply because the initial value was low. However, if your ROV demonstrates clear evidence of a deficient appraisal or material errors that the original appraiser refuses to fix, the lender may approve a second independent appraisal. Note that second appraisals add cost and can delay closing.

Tips for sellers on how to avoid a low appraisal

Sellers can take proactive steps to minimize the risk of a low appraisal before the appraiser arrives:

• Price accurately: Work with your real estate agent to set a realistic list price based on recent neighborhood comps rather than speculative market highs.
• Document all upgrades: Compile an itemized list of major home improvements, complete with installation dates, receipts, and contractor invoices, to hand to the appraiser.
• Address minor repairs: Fix visible defects such as leaky faucets, cracked windows, or peeling paint to ensure the home presents well.
• Provide full property access: Ensure the appraiser has unobstructed access to all areas, including attics, basements, crawl spaces, and detached structures.

FAQ

Here are some frequently asked questions about low home appraisals.

Do I want a high or low appraisal?

As a buyer, a higher appraisal is preferable because it confirms you are getting a good deal relative to the home’s worth. You’re also gaining immediate home equity, which can help with mortgage approval. A seller always wants an appraisal that meets or exceeds the contract price to prevent closing delays or price renegotiations.

Can a seller lower the price after a low appraisal?

Yes, a seller can agree to execute a contract amendment lowering the purchase price to match the appraised value. This is often the simplest way to keep the transaction moving forward.

Can you finance an appraisal gap?

No, mortgage lenders will not allow you to add an appraisal gap directly into your primary mortgage balance because doing so would exceed maximum allowed loan-to-value (LTV) limits. The gap must be resolved through price reductions, cash payments, or loan structure adjustments.

The bottom line

A home appraisal is a key final step towards closing day. Receiving a low appraisal can complicate your home purchase, but it does not have to end the deal. Understanding your options if the appraisal comes in low and working with a qualified real estate agent can help resolve any issues and keep closing on track.

When you are ready to navigate your home loan process or explore preapproval, you can apply online with Rocket Mortgage.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.