Frequently Asked Questions About Appraisal Contingencies

When buying a house and getting an appraisal to help secure a mortgage loan, what happens if the house appraises for less than the offer price? If a house appraises for less than the offer price, then the lender will only provide up to the appraised amount. If the buyer still wants to proceed, they’ll have to cover the difference themselves or use the low appraisal to negotiate a lower sales price.

This article will guide both buyers and sellers through the process of addressing appraisal gaps and how appraisal contingencies can protect you.

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Quick answer: What a low appraisal actually means

A low appraisal means that a home’s appraised value is lower than the agreed-upon contract price. It effectively means that the owner is asking for more than the property’s fair market value.

The difference between the low appraisal and the contract price is called an appraisal gap. Because they want to reduce risk to themselves, lenders will use whichever value is lower between the appraisal value or the contract price to determine the maximum loan amount.

If the buyer wants to still buy a property where the appraisal is low, they have to cover the appraisal gap with their own funds.

What happens if the appraisal is lower than the offer

The outcome of a low appraisal largely depends on the reactions of the buyer and seller. Here are the possibilities from each perspective:

For buyers:

• Renegotiate the sales price to reflect the lower appraisal.
• Ask the seller to provide concessions.
• Pay the additional amount or make a larger down payment.
• Use an appraisal gap clause and pay up to a specified amount.
• Challenge the appraisal and ask for a reevaluation.
• Walk away from the sale if you have an appraisal contingency in the contract.

For sellers:

• Lower the price to reflect the lower appraisal value.
• Offer concessions like closing cost assistance or repair credits.
• Make property improvements and try again with a different seller.
• Stick to the original price and risk the buyer walking away from the sale.

For example, if the buyer receives a low appraisal, they can have their agent notify the seller and propose a new contract with the updated price.

How the math works when the appraisal is low

When the appraisal is lower than the sales prices, the lender will only provide a loan up to the appraised amount.

For instance, a seller might be asking for $400,000, but an appraisal returns a value of $360,000. In this case, the appraisal gap is $40,000 — approximately 10% of the asking price.

In this case, the lender will only offer to loan the buyer up to $360,000. If the buyer wishes to proceed with the sale, they will be required to cover the appraisal gap of $40,000.

A low appraisal can cause your loan-to-value ratio (LTV) to jump because the loan represents a larger portion of the home’s value. A higher LTV means your down payment could drop below 20%, which could trigger the need for mortgage insurance.

For FHA appraisals, the lower appraisal sticks with the property for several months, so any future FHA buyers are required to adhere to the lower amount.

What is an appraisal contingency, and how does it protect you?

Most real estate contracts include an appraisal contingency, which allows the buyer to back out of the sale if the house appraises for less than the offer. An appraisal contingency is a straightforward way to protect the buyer from being locked into a sales contract when they cannot obtain a loan at the offer price.

Without an appraisal contingency clause, the buyer may still be able to walk away, but they could lose any earnest money they put down. The seller could also take legal action if the buyer backs out without a contractually valid reason.

An appraisal contingency protects the buyers' earnest money and insulates them from potential legal action for breach of contract.

Appraisal gap clauses: How they work and when to use them

Real estate contracts sometimes account for the possibility of low appraisals with an appraisal gap clause. This is a clause stating that the buyer will pay the difference in any appraisal gap, up to an agreed-upon limit.

Say a contract has an appraisal gap of $10,000, and the appraisal comes in at $8,000 lower than the asking price. Because the gap is lower than the amount specified in the clause, the buyer would be contractually obligated to proceed with the sale or lose earnest money.

Alternatively, if the appraisal gap came in at $12,000, the buyer would be able to back out without losing the earnest money.

For buyers, an appraisal gap clause can make offers stand out in a hot market by giving the seller more leeway on pricing. However, buyers can end up paying significantly more at closing if they make the accepted gap too large.

For sellers, the clause keeps the deal from falling through due to a lower-than-expected appraisal and helps them maintain a higher asking price.

Buyer playbook: What to do if the house appraises for less than the offer

A low appraisal won’t automatically kill a deal, but it could kick off additional negotiations.

Below is a quick guide on what buyers should do if a house appraises for less than the offer:

• Talk to your agent/lender: Contact your lender to see if the lower appraisal will impact your LTV. You can also discuss the option of paying the appraisal gap with your agent.
• Assess your cash reserves: Calculate your total cash reserves to see if you’d be comfortable paying the appraisal gap. You’ll need more money to pay for the gap as well as closing costs and the down payment.
• Negotiate with the seller: Ask the seller if they’d consider dropping the price to the lower appraised value or offering seller’s concessions.
• Use your contingencies: If you have an appraisal contingency, you can leverage it to get a lower price. Some sellers would rather sell for less than lose the sale entirely.
• Challenge the appraisal: You could also request a reconsideration of value (ROV) if you think the appraiser made errors.
• Back out of the deal: If none of the above options are available, you can back out, though you may lose any earnest money deposit.

Seller playbook: What to do when the appraisal comes in low

If you are a seller and the house appraises for less than the offer, the approach looks different:

• Review the appraisal with an agent: Begin by reviewing the appraisal with your agent to identify potential errors and inconsistencies.
• Decide on negotiations: Next, decide whether you’re willing to lower the asking price or offer concessions, such as repair credits.
• Consider making repairs or updates: Repairs and updates can raise the appraised value if you relist the property, especially if you make FHA- and VA-required repairs.
• Stand your ground: In a hot market, you may be able to stand your ground and hold out for the buyer to pay the appraisal gap.

If there’s a low appraisal and nobody wants to budge, what happens next depends on contingency clauses. If the buyer has an appraisal contingency in the contract, they can back out without losing earnest money deposits.

Should you waive the appraisal contingency?

For some sellers, an appraisal contingency can be a reason not to accept a specific buyer's offer. If it’s currently a hot seller’s market, buyers might consider waiving their appraisal contingency to distinguish themselves from other bidders.

Of course, the obvious risk of waiving this contingency is that the property will appraise for significantly less than the contract price and the buyer will end up overpaying. Waiving also eliminates any leverage to negotiate for a lower price upon a low appraisal.

Before deciding to waive the contingency, ask yourself the following questions:

• How confident are you in your comparative assessment of the property value?
• Do you have sufficient cash reserves to cover the down payment and closing costs?
• How common is appraisal contingency waiving in the neighborhood?

If any of the following are true, you should NOT consider waiving the appraisal contingency:

• You have limited cash reserves.
• The real estate market is highly volatile.
• The property is unique, and similar comps are not available.

FHA/VA appraisals and low values

FHA and VA appraisals don’t simply determine the property’s fair market value. They also include checking whether the property adheres to certain safety standards.

The important difference between an appraisal for a conventional loan and FHA loan or VA loan appraisals is that an FHA or VA appraisal can “stick” to the home. If a seller is trying to sell a home, accepts an offer from an FHA or VA buyer, and then that FHA or VA appraisal comes in below the offer price, the appraised value is “locked in” for a specific period (typically four to six months for an FHA loan and six months for a VA loan, though market conditions could affect those timelines).

During this period, any new buyers using an FHA or VA loan would not be able to get a loan approved for more than the original appraisal value.

If a seller runs into this problem, there are a few options to salvage the deal:

• They could lower the asking price to the appraised value.
• They could perform repairs and get a new inspection.
• The buyer could shift to a conventional mortgage.
• The seller can look for a conventional loan buyer or an all-cash buyer instead.

How often do appraisals come in lower than the offer?

Assuming normal and balanced market conditions, low appraisals are relatively uncommon. However, they become more common during periods of rapid price appreciation and conditions where sellers have significant leverage.

Appraisals are most accurate in markets with a sufficient volume of comparable real estate transactions. By comparing average sales of similar properties in the neighborhood, appraisers can more accurately determine the value of a given property.

Final takeaway

A low appraisal doesn’t necessarily kill a real estate transaction, but it can provide a valuable point of negotiation for buyers. By leveraging appraisal contingencies and earnest money, buyers can use a low appraisal to push for a lower price.

In these circumstances, having good representation for real estate negotiations can matter the most. 

If you want to try to avoid an appraisal gap, consider working with an experienced local agent who’s knowledgeable about your market. Clever’s network of top agents can help you find an agent in your neighborhood who helps close home sale transactions every day for people like you. Take a short quiz to find an agent now!

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