You’ve found the perfect house, negotiated a price both parties agreed on, and your mortgage application is well underway. You can practically taste the celebratory pizza you’ll eat on the living room floor of your new home.
Then, the email arrives. The appraisal came in low.
Suddenly, a massive wrench is thrown into your home-buying machinery. Because lenders will only finance a loan based on the appraised value of a home—not the agreed-upon purchase price—a low appraisal creates a financial gap.
Take a deep breath. A low appraisal is a major speed bump, but it’s rarely a total dead end. Here is a step-by-step guide on what to do next.
The Root of the Problem: Why Does it Matter?
Before diving into solutions, let’s look at the math.
Say you agreed to buy a home for $400,000 with a 10% down payment ($40,000), meaning you need a loan of $360,000.
If the appraisal comes back at $380,000, the lender will only base their loan-to-value (LTV) ratio on that $380,000 figure. Your 10% down payment is now $38,000, and the maximum the bank will lend you is $342,000.
The Appraisal Gap: You still owe the seller $400,000, but your loan plus down payment only equals $380,000. You are left with a $18,000 gap to resolve.
Here are your five primary strategies to bridge that gap.
Option 1: Renegotiate the Purchase Price
This is the most common first step. Your agent will approach the seller’s agent with the appraisal report. Because the seller now knows their home is officially valued at a lower price—and that any other buyer using a mortgage will likely face the same issue—they are often willing to come to the table.
- The Best-Case Scenario: The seller lowers the price to match the appraisal.
- The Compromise: You meet in the middle. The seller drops the price halfway, and you agree to cover the remaining difference.
Option 2: Cover the “Appraisal Gap” with Cash
If you have extra cash on hand, you can simply pay the difference out of pocket at closing.
While this is a straightforward solution, you must ask yourself: Are you comfortable paying more for the home than an independent appraiser says it is worth? If it’s your forever home in a rapidly appreciating neighborhood, it might be worth it. If you plan to move in three years, you might struggle to recoup that money.
Option 3: Meet in the Middle (Restructure the Loan)
If you don’t have piles of extra cash lying around, you might be able to shift your existing funds.
Instead of putting down your original 20% down payment, you could reduce your down payment to 10% or 15% and use the freed-up cash to cover the appraisal gap.
- Note: Keep in mind that lowering your down payment below 20% will likely trigger Private Mortgage Insurance (PMI), which will increase your monthly payment.
Option 4: Dispute the Appraisal (Reconsideration of Value)
Appraisers are human, and they can make mistakes. If you and your real estate agent believe the valuation is genuinely inaccurate, you can submit a Reconsideration of Value (ROV). To win a dispute, you must provide hard evidence:
- Missed Comps: Did the appraiser overlook a highly similar home that sold down the street last week?
- Incorrect Data: Did they list the home as having three bedrooms when it actually has four? Did they get the square footage wrong?
- Neighborhood Nuances: Did they pull comparable homes from across a major highway or school district boundary that doesn’t accurately reflect your immediate neighborhood’s value?
Option 5: Walk Away (The Escape Hatch)
If the seller refuses to budge, you don’t have the cash to cover the difference, and the lender won’t approve the loan, you may have to walk away.
This is where your appraisal contingency or financing contingency comes into play. If your contract includes these clauses, you can back out of the deal and get your earnest money deposit returned. It’s a heartbreaking result, but it protects you from overpaying for an asset or losing thousands of dollars.
The Bottom Line
A low appraisal is stressful, but it’s also a built-in safety net designed to keep you from borrowing more than a property is worth.
If you find yourself facing an appraisal gap, lean heavily on your real estate agent. They navigate these waters every day and can help you draft the right negotiation strategy, structure a rebuttal, or—if necessary—help you walk away to find a home that fits your budget perfectly.