The Appraisal Process: What Happens If It Comes in Low
Your lender will not loan you more than the home is worth — and the appraisal is how they determine that value. If the appraised value comes in lower than your purchase price, it creates a gap that needs to be resolved before closing.
How the Appraisal Works
After your loan application is submitted, the lender orders an appraisal from a licensed, independent appraiser. The appraiser visits the property, notes its condition and features, and then compares it to recently sold similar homes in the area — called comparables or comps. The appraisal typically costs $400 to $700 and is paid by you. The appraiser produces a report with an opinion of market value. This value determines the maximum amount the lender will finance.
What Affects the Appraised Value
Appraisers weigh several factors: the home's square footage, lot size, condition, age, number of bedrooms and bathrooms, upgrades, and comparable sales within the past six months. Location matters significantly — two identical homes in different neighborhoods can appraise very differently. Market conditions also play a role: in a rapidly appreciating market, appraisals may lag behind what buyers are actually paying, leading to more frequent low appraisals.
What Happens When It Comes in Low
If the appraisal is below your purchase price, you have several options. First, negotiate with the seller to lower the price to the appraised value. Second, you can pay the difference out of pocket — this is called covering the appraisal gap. Third, meet in the middle with the seller splitting the difference. Fourth, challenge the appraisal by providing additional comparable sales to the lender and requesting a reconsideration of value. Fifth, walk away using your appraisal contingency. In competitive markets, some buyers include an appraisal gap clause in their initial offer, agreeing to cover a specified amount above the appraised value.
How to Prepare
Before you get to the appraisal, ask your agent to pull comps and give you a realistic value range for the home. If you are paying significantly above recent comps, prepare for the possibility of a low appraisal. If you waived your appraisal contingency to win a bidding war, understand that you are committed to covering any gap out of pocket — make sure you have the funds available.
Key Takeaways
- ✓The appraisal determines how much the lender will finance — it protects you from overpaying
- ✓Low appraisals can be negotiated, challenged, or covered with additional cash
- ✓Ask your agent for comps before the appraisal to know what to expect
- ✓An appraisal contingency gives you an exit if the value falls short
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