What Is an Appraisal Gap?

Short answer

An appraisal gap is the amount by which the agreed purchase price exceeds the appraised value. If you agree to pay $600,000 and the appraisal says $575,000, the gap is $25,000. Because lenders lend on the lower of price or value, someone has to cover that gap in cash or the price has to come down.

Definition

The appraisal gap is the shortfall between contract price and appraised value. An 'appraisal gap guarantee' is a clause in which the buyer promises in advance to pay up to a set amount above the appraisal to win a competitive offer.

Worked example

Contract $600,000, planned 10% down ($60,000), loan $540,000. Appraisal $575,000. The lender now caps the loan at 90% of $575,000 = $517,500. Your cash to close becomes: $600,000 - $517,500 = $82,500, which is $22,500 more than planned. If you keep the $540,000 loan instead, LTV = $540,000 / $575,000 = 93.9%, so your PMI rate rises and you may need to drop to a program that allows that LTV. Splitting the gap with the seller at $587,500 cuts your extra cash to $11,250.

Your options when a gap appears

• Pay the gap: bring the difference in cash; the loan stays at the original LTV on the appraised value.
• Renegotiate: sellers often lower the price or split the difference rather than relist.
• Reconsideration of value: your agent and loan officer submit better comparable sales to the appraiser.
• Change the loan structure: a higher LTV program with PMI, or a smaller down payment on a different program, can shrink the cash needed.
• Cancel: if your contract includes an appraisal contingency and the deadline has not passed.

Appraisal gap clauses

A gap clause says, for example, 'Buyer will cover up to $20,000 of any appraisal shortfall.' It strengthens your offer without going fully non-contingent. Only write it for an amount you have verified in your bank, on top of your down payment, closing costs and reserves. Your pre-approval letter should be re-run at the higher cash requirement.

In South Florida

Appraisal gaps show up in South Florida when buyers compete for single-family homes in areas like Coral Gables, Pinecrest or Weston and in new or quickly appreciating condo buildings where few comparable sales exist. Cash and foreign buyers set prices that financed buyers struggle to match on paper. If you plan to write an appraisal gap clause, get the exact cash figure from your loan officer first, including Florida doc stamps and intangible tax that scale with the loan amount, so you know your true ceiling.