You’ve found the home you want, negotiated the price, and started the mortgage process.
Then the appraisal comes back.
Instead of confirming that the home is worth the purchase price, the appraiser determines that the property is worth less than what you agreed to pay.
Now what?
A low appraisal can create an unexpected challenge during the homebuying process, but it doesn’t necessarily mean the transaction is over.
Depending on the circumstances, the buyer, seller, and lender may have several options.
Understanding what a low appraisal means and what you can do next can help you make a more informed decision.
What Is a Home Appraisal?
A home appraisal is an independent assessment of a property’s market value.
Mortgage lenders generally use appraisals to help determine whether the property provides sufficient collateral for the loan.
The appraiser considers factors such as:
- Property location
- Size of the home
- Condition
- Number of bedrooms and bathrooms
- Property features
- Recent comparable sales
- Local market conditions
- Improvements and renovations
The goal is to determine an estimated market value based on relevant information.
What Does It Mean When an Appraisal Comes in Low?
A low appraisal generally means the appraised value is lower than the purchase price agreed upon by the buyer and seller.
For example:
Purchase price: $400,000
Appraised value: $380,000
Appraisal difference: $20,000
The lender may base its loan calculation on the applicable appraised value rather than simply accepting the $400,000 contract price.
That can create a financing gap.
Why Does a Low Appraisal Matter to the Mortgage Lender?
The property serves as collateral for the mortgage.
The lender wants to make sure the amount being financed is supported by the property’s value under the applicable underwriting rules.
If a buyer agrees to pay $400,000 for a property that is appraised at $380,000, the lender may have concerns about financing the transaction based on the higher contract price.
This is why an appraisal can affect the amount of financing available.
Does a Low Appraisal Automatically Kill the Deal?
No.
A low appraisal doesn’t automatically mean the transaction has to fall apart.
The parties may have several potential options, including:
- Renegotiating the purchase price
- Challenging the appraisal
- Requesting a reconsideration of value
- Increasing the buyer’s cash contribution
- Combining multiple solutions
- Canceling the transaction if the contract permits
The best option depends on the circumstances and the terms of the purchase contract.
Why Might an Appraisal Be Lower Than the Purchase Price?
There are several reasons.
Comparable Sales Don’t Support the Contract Price
Appraisers generally look at recent comparable properties to help determine value.
If similar homes recently sold for less than your agreed purchase price, the appraiser may determine that the contract price is above market-supported value.
The Market Has Changed
Real estate markets can change quickly.
A property may have been priced based on older market conditions that no longer accurately reflect current sales.
The Property Has Condition Issues
The appraiser may identify issues that affect the property’s market value.
These could include:
- Deferred maintenance
- Outdated features
- Structural concerns
- Damage
- Incomplete renovations
The Home Has Unique Features
A property that is significantly different from nearby homes can be harder to compare.
For example, an unusually large addition or highly customized property may have fewer directly comparable sales.
The Contract Price Is Simply Higher Than Market Value
Sometimes a buyer is willing to pay more than the broader market data supports.
That doesn’t necessarily mean the buyer made a mistake.
A buyer may value a specific location, layout, school district, lot, or other characteristic more highly than the typical market buyer.
However, the lender still has to evaluate the property’s value under applicable lending guidelines.
What Is an Appraisal Gap?
An appraisal gap is the difference between the purchase price and the appraised value.
For example:
Purchase price: $500,000
Appraised value: $475,000
Appraisal gap: $25,000
The buyer and seller then have to determine how to address that difference.
The larger the gap, the more important the financing and contract terms become.
What Happens to Your Mortgage If the Appraisal Is Low?
The impact depends on the loan program, loan-to-value ratio, contract terms, and other aspects of the transaction.
The lender may determine that the original financing structure needs to change.
For example, the buyer may need to bring additional money to closing if the loan amount cannot be increased to cover the higher purchase price.
This is why buyers should understand their financing structure before making an offer.
Can You Negotiate a Lower Purchase Price?
Yes, you can ask the seller to reduce the purchase price.
For example:
Original price: $400,000
Appraised value: $380,000
The buyer could ask the seller to reduce the purchase price to $380,000.
If the seller agrees, the appraisal gap may effectively disappear.
However, the seller doesn’t have to agree.
The seller may believe the property is worth the original contract price and may prefer to find another buyer.
What If the Seller Won’t Lower the Price?
You may still have other options.
Depending on the circumstances, you could potentially:
- Increase your down payment
- Cover some or all of the appraisal gap
- Negotiate a partial price reduction
- Challenge the appraisal
- Walk away if your contract permits
The right choice depends on your finances and how much you believe the property is worth.
Can the Buyer Pay the Appraisal Gap?
In some transactions, a buyer may choose to contribute additional cash to bridge the difference.
Using the earlier example:
Purchase price: $400,000
Appraised value: $380,000
Gap: $20,000
The buyer may decide to contribute additional funds, subject to the lender’s requirements and the overall transaction structure.
But this decision deserves careful consideration.
Putting an additional $20,000 into a home isn’t a small decision.
You should consider how much money you’ll have left after closing and whether the additional contribution makes financial sense.
Should You Pay a Large Appraisal Gap?
There’s no universal answer.
Consider questions such as:
- How much do you love the property?
- Is the location difficult to replace?
- How long do you expect to own it?
- Can you comfortably afford the additional cash?
- Will you still have emergency savings?
- Are there other comparable homes available?
- Do you believe the appraisal is inaccurate?
- How competitive is the market?
A buyer shouldn’t feel pressured into spending more than they can comfortably afford simply because they already invested time and money into the transaction.
Can You Challenge a Low Appraisal?
Potentially, yes.
If you believe the appraisal doesn’t accurately reflect the property’s value, you can discuss the situation with your lender and ask about the process for requesting a reconsideration of value.
A reconsideration may involve providing additional information that the appraiser may not have considered.
For example, you may have information about:
- More recent comparable sales
- Relevant property improvements
- Comparable properties the appraiser didn’t consider
- Errors in the property description
- Incorrect square footage
- Incorrect room count
- Other factual inaccuracies
The lender and appraisal process determine how the request is handled.
What Should You Look for in the Appraisal?
If you’re reviewing a low appraisal, don’t immediately focus only on the final number.
Review the report for factual accuracy.
Check things such as:
- Property address
- Square footage
- Number of bedrooms
- Number of bathrooms
- Lot size
- Property condition
- Improvements
- Garage information
- Comparable sales
- Dates of comparable sales
- Adjustments applied to comparable properties
An error in the underlying information could potentially affect the valuation.
What If the Appraiser Missed a Recent Comparable Sale?
Markets can move quickly.
A comparable property may have sold recently but not been included in the appraisal.
If you have credible information showing that a more relevant comparable exists, discuss it with your lender.
The lender can explain whether that information can be submitted as part of a reconsideration process.
Don’t assume that simply finding a higher-priced home automatically proves the appraisal is wrong.
The comparable still needs to be relevant to the property being evaluated.
Can You Get a Second Appraisal?
Whether another appraisal can be ordered depends on the lender, loan program, circumstances, and applicable requirements.
A second appraisal isn’t necessarily a guaranteed solution.
It can also involve additional costs and may produce a similar or even lower valuation.
Before ordering another appraisal, discuss the situation with your mortgage professional.
What If the Appraisal Is Much Lower Than the Purchase Price?
A large gap can create a more significant financing problem.
For example:
Purchase price: $500,000
Appraised value: $450,000
Gap: $50,000
A $50,000 difference may be difficult for a buyer to cover out of pocket.
In this situation, negotiating with the seller or reviewing the appraisal carefully may become especially important.
What If the Appraisal Is Only Slightly Low?
A small gap may be easier to resolve.
For example:
Purchase price: $400,000
Appraised value: $395,000
Gap: $5,000
The parties may have more flexibility.
The seller could potentially reduce the price, the buyer could potentially contribute additional funds, or the parties could negotiate another arrangement.
The important thing is to understand the financial consequences before agreeing to anything.
Can the Seller Challenge the Appraisal?
The buyer isn’t necessarily the only party interested in the valuation.
A seller may also have an interest in supporting the contract price.
However, the lender generally controls the mortgage underwriting and appraisal process.
If additional information is available, the appropriate parties can discuss whether a reconsideration or other process is available.
What If You’re Buying in a Competitive Market?
Low appraisals can become particularly challenging in competitive markets.
Buyers may offer above asking price to compete against other buyers.
For example:
Asking price: $450,000
Buyer offer: $475,000
Appraised value: $455,000
The buyer has effectively offered more than the property’s appraised value.
This doesn’t necessarily mean the buyer shouldn’t proceed.
It means the buyer needs to understand the potential financing consequences before making the offer.
Should You Include an Appraisal Contingency?
An appraisal contingency can provide buyers with contractual protection when the property doesn’t appraise at the agreed purchase price.
The exact terms vary by contract.
Depending on the agreement, an appraisal contingency may provide options such as:
- Renegotiating the purchase price
- Requesting other concessions
- Canceling the transaction under specified conditions
- Proceeding while covering a gap
The specific contract language matters.
Buyers should discuss contractual questions with their real estate agent or attorney.
What Is an Appraisal Waiver?
In certain mortgage transactions, a lender or automated underwriting system may determine that a traditional appraisal isn’t required.
This can happen under specific circumstances and eligibility requirements.
An appraisal waiver doesn’t mean the property has no value or that buyers should ignore the price they’re paying.
It simply means the lender may not require a traditional appraisal under the applicable process.
Does a Low Appraisal Affect the Seller?
It can.
A low appraisal may force the seller to reconsider the transaction.
The seller could:
- Reduce the price
- Split the difference
- Refuse to change the price
- Wait for another buyer
- Negotiate other terms
The seller’s willingness to adjust depends on market conditions and personal circumstances.
Does a Low Appraisal Affect the Buyer?
Potentially.
The buyer may need to contribute additional money, renegotiate the transaction, or reconsider whether the property is worth the agreed price.
The buyer also needs to think about the home’s future value.
Paying substantially more than appraised value may be reasonable in certain situations, but it should be a deliberate decision rather than an emotional reaction.
What If You Really Want the House?
This is where emotions can make the situation difficult.
You may have already:
- Fallen in love with the home
- Paid for inspections
- Spent time negotiating
- Started packing
- Planned your move
- Invested money into the transaction
That can make it tempting to simply pay the difference.
But before doing so, step back and evaluate the numbers.
Ask yourself:
“Would I still think this home is worth the additional money if I weren’t already emotionally invested in it?”
That question can help separate the property’s actual value from the excitement of buying it.
What If You Don’t Have Extra Cash?
If you don’t have enough money to cover an appraisal gap, don’t assume the transaction is automatically over.
Talk with your mortgage professional and real estate agent.
Potential options may include:
- Negotiating a lower purchase price
- Asking the seller to cover certain eligible costs
- Requesting a reconsideration of value
- Adjusting the loan structure where permitted
- Changing the down payment
- Reviewing another financing option
The available solutions depend on the transaction.
Don’t Borrow Money Without Talking to Your Lender
If you’re considering borrowing money to cover an appraisal gap, talk with your mortgage professional before doing so.
Taking out a personal loan, opening a new credit account, or otherwise changing your financial profile can affect mortgage underwriting.
Don’t try to solve the appraisal problem by creating a new financial problem.
How Does a Low Appraisal Affect Your Down Payment?
The impact on your down payment depends on the loan amount, loan-to-value calculation, purchase price, appraised value, and loan program.
If the lender reduces the amount it is willing to finance, the buyer may need to contribute more cash.
This is one reason buyers should avoid planning to spend every dollar they have available for the purchase.
Keep Extra Cash Available When Possible
A home purchase already comes with substantial upfront expenses.
You may need money for:
- Down payment
- Closing costs
- Inspection
- Appraisal
- Moving expenses
- Immediate repairs
- Furniture
- Emergency savings
If a low appraisal creates an unexpected cash requirement, having additional savings can give you more flexibility.
Common Low-Appraisal Mistakes
Assuming the Seller Must Lower the Price
The seller can negotiate, but they aren’t automatically required to reduce the price.
Automatically Paying the Difference
Don’t agree to a large appraisal gap without reviewing your finances.
Ignoring Potential Errors
Review the appraisal for factual inaccuracies.
Ordering Another Appraisal Without Guidance
Talk with your lender before taking this step.
Taking on New Debt
A new loan or credit account can affect your mortgage qualification.
Making an Emotional Decision
Remember that the appraisal issue is ultimately a financial decision.
What Should You Do Immediately After a Low Appraisal?
If the appraisal comes in below the purchase price:
Step 1: Review the Appraisal
Look for factual errors and understand how the appraiser arrived at the valuation.
Step 2: Contact Your Loan Officer
Ask how the appraisal affects your loan amount and financing structure.
Step 3: Talk With Your Real Estate Agent
Your agent can help you understand your negotiation options with the seller.
Step 4: Review Your Contract
Understand your appraisal contingency and other applicable provisions.
Step 5: Evaluate the Gap
Determine exactly how much additional money would be required if you proceed.
Step 6: Consider Your Alternatives
Compare renegotiating, challenging the appraisal, contributing additional funds, or walking away if permitted.
Step 7: Make a Financial Decision
Don’t let the excitement of buying the home determine the answer for you.
Low Appraisal Checklist
If your appraisal comes in low, review:
- Purchase price
- Appraised value
- Exact appraisal gap
- Loan amount
- Loan-to-value ratio
- Available cash
- Emergency savings
- Appraisal report
- Comparable sales
- Potential appraisal errors
- Appraisal contingency
- Seller negotiation options
- Reconsideration options
- Alternative financing options
- Closing timeline
How KASH Mortgage Group Can Help
KASH Mortgage Group guides borrowers through the mortgage process from documentation and appraisal through underwriting, conditional approval, clear to close, and closing. Its current mortgage process specifically identifies appraisal as an early step in evaluating the property.
When an appraisal comes in lower than expected, having a mortgage professional involved can help you understand how the valuation affects your financing.
KASH Mortgage Group serves borrowers in Pennsylvania, New Jersey, Ohio, and Florida and offers personalized mortgage solutions for homebuyers with different financial situations.
If you’re dealing with a low appraisal, speak with your loan professional before making changes to your financing or financial situation.
Conclusion
A low home appraisal can be frustrating, especially when you’ve already agreed on a purchase price.
But a low appraisal doesn’t automatically mean you have to abandon the transaction.
You may have options such as negotiating with the seller, requesting a reconsideration of value, contributing additional funds, or reviewing alternative solutions.
The most important thing is to understand the numbers before making a decision.
Don’t let the excitement of buying a home push you into paying more than you’re comfortable with.
A low appraisal isn’t necessarily the end of the deal. It’s a signal to stop, review the numbers, and decide whether the home still makes financial sense.
