Appraisal Gap Coverage: What Buyers Need to Know

Appraisal Gap Coverage: What Buyers Need to Know

When you’re buying a home, the process can be full of surprises—and one of the most stressful is an appraisal gap. You find the perfect home, agree on a price with the seller, and move forward with your mortgage… only to find out that your mortgage company has appraised the home you want to purchase for less than the agreed purchase price. Now what? This is where appraisal gap coverage comes in.

Appraisal gap coverage is a strategy buyers use to strengthen their offer and protect their deal in case the home’s appraised value is lower than the offer price. It’s become especially common in hot real estate markets where bidding wars drive home prices higher than what appraisers think they’re worth. In this article, I’ll break down exactly what appraisal gap coverage is, how it works, and what you should consider before using it.

 

What is an Appraisal Gap?

When you’re financing a home with a mortgage, the lender orders an appraisal to determine the home’s fair market value. This is done to ensure the lender isn’t loaning you more money than the home is worth.

If the appraised value is equal to or greater than the purchase price, no problem—the deal moves forward. But if the home appraises below the purchase price, there’s an appraisal gap.

✅ Kentucky Tom Pro Tip: Here’s an example:

• • • • • Agreed purchase price: $400,000
        • Appraised value: $375,000
        • Appraisal gap: $25,000

The lender will only base your mortgage on the $375,000, leaving you to figure out how to make up the $25,000 difference—or risk losing the house.

 

What is Appraisal Gap Coverage?

Appraisal gap coverage is a buyer’s agreement to cover all or part of the difference between the appraised value and the contract price. It’s typically included as part of the purchase agreement and signals to the seller that you’re serious—and financially prepared to handle a low appraisal.

There are generally two types:

1. 1. Full appraisal gap coverage – You agree to cover the entire difference between the appraisal and purchase price, regardless of the amount.
   2. Partial appraisal gap coverage – You agree to cover the difference up to a certain dollar amount. For example, “Buyer agrees to cover up to $10,000 over the appraised value.”

 

Why Sellers Love It

In a competitive housing market, sellers want to avoid deals falling apart over appraisal issues. When multiple buyers are offering over asking price, they may worry the deal won’t survive the appraisal.

By including appraisal gap coverage in your offer, you’re giving the seller confidence that you’ll stick with the purchase even if the appraisal comes in low. This can help your offer stand out, especially if you’re up against other buyers who don’t offer similar assurances.

 

Why Buyers Should Be Cautious

Appraisal gap coverage can help win the home—but it comes with financial risks.

Here’s why:

• • You’ll need to bring more cash to closing. If your appraisal comes in low and you agreed to cover the difference, that money can’t be rolled into your loan.
  • Your loan-to-value (LTV) ratio will change. A lower appraisal means your LTV increases, which could affect your mortgage terms, possibly increasing your interest rate or requiring private mortgage insurance (PMI).
  • You may end up overpaying for a home that isn’t worth the price according to independent valuation.

That’s why it’s essential to make sure you can actually afford the gap, and that you’re still comfortable with the value you’re getting.

 

When Should Buyers Use Appraisal Gap Coverage?

Appraisal gap coverage makes sense in the following situations:

• • You’re in a seller’s market with limited inventory and bidding wars.
  • You’re offering over asking price and want to strengthen your offer.
  • You have extra cash reserves and are comfortable using them to bridge the gap.
  • You’ve already lost out on several homes and want to show you’re a committed buyer.

However, appraisal gap coverage is not a great idea if:

• • You’re tight on funds for closing and can’t afford unexpected costs.
  • You’re unsure about the true value of the home and worried about overpaying.
  • You’re buying in a declining or unstable market where values may drop further.

 

How to Include Appraisal Gap Coverage in an Offer

If you decide to include appraisal gap coverage, make sure it’s clearly stated in your offer. Work with your real estate agent to write the clause correctly, such as:

“Buyer agrees to cover any appraisal shortfall up to $15,000 in cash, not to exceed the purchase price.”

This way, both parties understand the buyer’s obligation and the seller knows they won’t have to renegotiate if the appraisal comes in low.

 

Alternatives to Appraisal Gap Coverage

If you’re not comfortable with appraisal gap coverage but still want to stay competitive, here are a few alternatives:

• • Increase your earnest money deposit to show financial seriousness.
  • Waive other contingencies like inspection or financing—but only if you fully understand the risk.
  • Negotiate with the seller to split the difference if the appraisal is low.
  • Re-negotiate the sale price based on the appraisal (though this may cause the seller to walk away).

 

For Your Consideration

Appraisal gap coverage can be a powerful tool in a hot housing market, helping buyers secure homes even when values are rising quickly. But it’s not a decision to take lightly. Buyers need to be financially prepared and emotionally ready to commit to a purchase that might not be justified by the appraisal.

Talk to your lender and real estate agent to understand what the numbers look like for you personally. If you’re going to offer appraisal gap coverage, make sure you know your limits—and don’t go beyond what makes financial sense. A great home is only a great deal if you can afford to keep it.

 

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